Milan, May 06, 2011 -- Moody's Investors Service today downgraded Intesa Sanpaolo's (Intesa) stand-along bank financial strength rating (BFSR) to C+, mapping to A2 on the long-term scale, from B- (which maps to an A1). The bank's long-term debt & deposit ratings were downgraded to Aa3 from Aa2, while the Prime-1 short-term debt & deposit ratings were unaffected by this rating action. The outlook on all ratings has been changed to stable from negative. Moody's also downgraded to A1 with a stable outlook from Aa3 the long-term deposit rating of Banca Infrastrutture Innovazione e Sviluppo (BIIS), Intesa's Italian subsidiary involved in lending to the public sector.
RATING RATIONALE
Moody's said that the downgrade of the Bank's standalone rating by one notch reflects Intesa's weakened profitability and deteriorated asset quality, which are now at levels more compatible with a BFSR of C+. The stable outlook reflects the rating agency's expectation that the performance weakening is bottoming out, but that any improvement is likely to be limited, in the still difficult operating environment the bank faces in its core market Italy. The rating agency also noted that the bank's Aa3 long-term deposit rating continues to benefit from two notches of uplift, as a result of a very high expectation of systemic support. The downgrade of the debt ratings in line with the BFSR rating action however also reflects Moody's view that the likely support from the Italian government may no longer fully compensate for weaker standalone profiles, resulting in this parallel rating action.
Moody's said that Intesa Sanpaolo's C+ BFSR remains underpinned (i) by the bank's leading position in Italy, with a market share for deposits and lending of around 17%, as well as (ii) by the diversification provided by its activities in Central and Eastern Europe. The rating agency also noted the successful completion of the integration of the merger of Banca Intesa and Sanpaolo IMI, which created Intesa Sanpaolo in 2007, despite having to complete this process during a period of financial and economic crisis, and without impairing the group's position of leadership in the Italian banking market.
Intesa reported a net profit of EUR 2.7 billion for 2010, 3.6% lower than 2009, reflecting a 7% reduction in net interest income, and a 59% reduction in trading income. This was to some extent offset by lower operating costs and a 16% reduction in loan loss charges. In its new business plan, published in April 2010, Intesa targets a net profit of EUR 4.2 billion by 2013, an increase of 55% compared to 2010. Moody's said that it does see potential for some improvement in profitability, given the expectation of rising interest rates which could lead to wider net interest margins, and further reduction in loan loss charges. However the rating agency said that considerable challenges remain to achieve the significantly higher levels of profitability targeted by the bank, given the still modest growth, and uncertain outlook, for the Italian economy.
Despite the reduction in loan loss charges recorded in 2010, Intesa's stock of non-performing loans increased further during 2010. The rating agency noted that these stand at a level significantly higher than pre-crisis levels, and in its business plan the bank states that it expects their level to fall by just 1.5% by 2013, also reflecting the long timescales required to work-out problem loans in Italy. Moody's said that despite the prospect for modest improvement, the degree of deterioration as well as the absolute level of these asset quality indicators are more compatible with a C+ BFSR, with a trend reversal unlikely over the short-to medium term.
In April 2011 Intesa announced a EUR 5 billion capital increase, which is fully underwritten, and is due to be completed by July 2011. This would bring the Core Tier 1 capital ratio to around 9.4%, compared to 7.9% at 2010 year-end. Intesa has been strengthening its capital adequacy through the crisis, with the Core Tier 1 ratio having stood at just 5.9% in 2007. Moody's said that it views positively this capital increase, bringing capital adequacy to a level that provides a significantly higher buffer to absorb potential losses, and positions the bank more favourably for the introduction of Basel III. The bank's business plan projects the Tier 1 ratio remaining at around 10% in coming years. Any excess capital generated beyond this would therefore be returned to shareholders, with this payout estimated by the bank at EUR 5.3 billion in the period from 2011 to 2013. As such the current capital is effectively "up fronting" the achievement of the target 10% Tier 1 ratio. Moody's said that this rating action factors in the successful completion of the underwritten capital increase, and maintaining at least the target of 10% Core Tier 1 ratio.
Moody's said that Intesa's BFSR could be upgraded in the event that the bank's profitability improves at least to the level envisaged in its business plan, while also reducing non-performing loans significantly, and maintaining a core Tier1 ratio higher than the 10% targeted.
Moody's said that the bank's BFSR could be downgraded further in the event that profitability was to deteriorate beyond its 2010 level, and should asset quality fail to show an improving trend. Failure to complete the capital increase or maintain the targeted core Tier 1 capital ratio of 10% could also put downward pressure on the ratings.
Moody's also downgraded to A1 from Aa3 the long-term deposit rating of BIIS, Intesa's Italian subsidiary involved in lending to the public sector. BIIS has a BFSR of C, mapping to A3 on the long-term scale. BIIS' long-term deposit rating benefits from a very high expectation of parental support, and as a result of the downgrade of the parent this now results in two notches of uplift, rather than three as was