Banca Popolare dell'Alto Adige – Volksbank Outlook Revised To Negative On Sharp Economic Contraction; Ratings Affirmed

  • We expect Italy to enter a deep recession in the first half of 2020, with a likely rebound during the second half and through 2021.
  • Economic support measures by Italian and European authorities will likely contain the rise in Banca Popolare dell'Alto Adige – Volksbank's loan loss provisions and ensuing pressure on its capitalization.
  • Nevertheless, we believe that downside risks for Volksbank remain material, taking into account the bank's high exposure to vulnerable, small and midsize enterprises and the importance of tourism for the local economy.
  • As such, we are revising the outlook to negative from stable and affirming the 'BB+/B' ratings.
  • The negative outlook reflects our view that the economic contraction could impair the bank's asset quality, earnings, and capitalization beyond our current expectations.
MILAN (S&P Global Ratings) March 26, 2020--S&P Global Ratings today revised its outlook on Italy-based Banca Popolare dell'Alto Adige – Volksbank to negative from stable and affirmed its 'BB+/B' long- and short-term issuer credit ratings.
The outlook revision reflects the sharp reduction in economic activity we anticipate for Italy in 2020 and our view that there are downside risks to the ratings given the material uncertainties associated with the COVID-19 pandemic. The longer and deeper the economic contraction, the more this could impair Volksbank's asset quality, increase credit losses, reduce business and revenue generation, and potentially erode its capital. The bank's structural exposures to local small and midsize enterprises (SMEs)--including tourism which we view as a more vulnerable sector in the current context--and its relatively modest business and revenue diversification compared to some larger and stronger domestic peers, also pose downside risks for Volksbank. We generally believe that small-to-midsize regional banks with loan concentrations to SMEs in regions that are strongly affected by the coronavirus outbreak are most susceptible in the near term to the deteriorating environment (see “COVID-19 Countermeasures May Contain Damage To Europe's Financial Institutions For Now,” and “The Coronavirus Pandemic Is Set To Test The Resiliency Of Italy's Banks,” both published on March 13, 2020).
The ratings affirmation reflects our expectation that Volksbank's capitalization will be able to withstand the negative effects of an unprecedented shock to the economy and private sector in the first half of this year. In our base case, we assume that this will be followed by a gradual recovery in economic activity from the second part of 2020, continued through 2021. We consider several supporting factors in our assessment:
  • First, the measures introduced by the Italian Government and European Central Bank will provide liquidity support to affected SMEs, individuals, and financial institutions while calming volatility in the capital markets;
  • Second, more than half of Volksbank's activities are concentrated in the wealthy, and likely more resilient, province of Bolzano. We expect this will continue to support the bank's asset quality despite the slowdown in the local tourism sector in particular; and
  • Third, legacy asset quality issues are smaller than for most other regional banks, with net nonperforming exposures (NPEs) to total adjusted capital of around 35% as of year-end 2019 compared to 50%-80% for most of its peers.
Nevertheless, we expect the current crisis will have a meaningful effect on the bank's earnings in 2020 and 2021, depending on when the recognition of credit losses occurs. We anticipate that the bank might be moderately loss making in 2020 due to sharply rising loan loss provisions, though we expect earnings to recover in 2021. This primarily reflects the likely rise in the stock of NPEs and the contraction of core revenues, both net interest income and commissions. Under the above assumption, we forecast that Volksbank's risk-adjusted capital will remain comfortably above 5% over the next two years while its asset quality will remain stronger than that of most domestic banks.
We acknowledge a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.
The negative outlook on Volksbank primarily reflects our view that the economic contraction in the areas in which the bank operates could impair its asset quality and capitalization beyond our current expectations over the next 12-18 months.
Consequently, we would most likely lower the ratings over the next 12 months if we observed a further material deterioration in economic and operating conditions, either because the downturn is deeper and longer, or the recovery weaker, than we currently anticipate. We could also lower the ratings if we observed that NPEs and credit losses were rising faster, and had a stronger impact on Volksbank's capitalization, than we currently expect.
We could revise the outlook back to stable if we considered that economic and operating conditions had stabilized and anticipated limited downside risks to our base-case expectations.
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