Banco Popolare Increases Capital Following a Net Loss, a Credit Positive
On 24 January, Banco Popolare Società Cooperativa (Ba3 positive, E+/b3 positive13) approved a share issue
up to €1.5 billion and announced a preliminary net loss of about €600 million in 2013. The net loss was
largely attributable to an increase of loan loss provisions following an inspection by the Bank of Italy.
The share issuance and the recognition of credit losses in advance of the ECB’s comprehensive assessment
are credit positive for the bank’s bondholders. Banco Popolare will be in a stronger position because its
share issue, which will be underwritten by UBS and Mediobanca and is to be completed in the first half of
this year, will strengthen its pro-forma fully loaded Basel III CET1 ratio to about 10%, and its asset quality
has been closely reviewed following the regulatory inspection. Banco Popolare’s high problem loans relative
to equity and loan loss reserves (98% in September 2013) made the bank vulnerable to even a small
parameter adjustment by the ECB.
The net loss, well above our expectations, was primarily generated by an increase of net loan loss provisions
to €1.7 billion (compared to €1.3 billion in 2012) and, to a lesser extent, by non-operating costs. The
provisions increase largely follows an inspection by the Bank of Italy, which has now concluded. The
regulator recommended provisions for nonperforming forborne exposures -- a new class of problem loans
introduced by the European Banking Authority in October 2013 and not previously provisioned -- in
addition to a stricter recognition of problem loans and higher reserve coverage.
By having the share issue fully underwritten, Banco Popolare has moved in advance of capital increases
expected by other banks such as Banca Monte dei Paschi di Siena S.p.A. (B2 negative, E/caa3), Banca
Popolare di Milano S.C.a.r.l. (B1 negative, E+/b2 stable) and Banca Carige S.p.A. (B3 negative, E/caa2
negative), which have instead delayed their required capital strengthening.
