Italian Iccrea Cooperative Banking Group 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 the Italian and European authorities will likely contain the rise in Gruppo Bancario Cooperativo Iccrea's (GBCI) loan loss provisions and ensuing pressure on its capitalization. This, coupled with GBCI's superior funding and liquidity profile, will likely support its creditworthiness, in our view.
  • Nevertheless, we believe that downside risks for GBCI remain material, taking into account the group's high exposures to vulnerable small and midsize enterprises (SMEs) and its relatively modest business and revenue diversification.
  • 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 group'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 Iccrea Banca and Iccrea BancaImpresa, core subsidiaries of Gruppo Bancario Cooperative Iccrea (GBCI), to negative from stable. At the same time, we affirmed the 'BB/B' long- and short-term issuer credit ratings. We base our ratings and outlook on GBCI's aggregated creditworthiness because we consider the BCC members (banche di credito cooperativo) and their parent company a single banking group.
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 GBCI's asset quality and profitability. This stems from the group's structurally high exposure to small and midsize enterprises (SMEs), mainly in Northern Italy, which represent about 45% of the group's loan portfolio and appear more vulnerable in the current context. 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 group's relatively modest business and revenue diversification, and weak cost efficiency compared to some larger and stronger domestic peers, also make the group more vulnerable to the economic downturn.
We consider that the group's comparatively high level of nonperforming exposures (NPEs) and historically weaker risk culture of its BCC members represent a tail risk for the group if the expected economic fallout from the COVID-19 outbreak in Italy is deeper and more prolonged than we currently expect. We now anticipate that the expected sharp economic downturn in 2020 could reverse GBCI's efforts to reduce its large stock of NPEs accumulated during the previous recession. We therefore expect GBCI's stock of NPEs to increase from 12.7% and credit loss provision to rise sharply from about 80 bps that we estimate for 2019.
Amid the nationwide lockdown, we also consider that the less advanced digitalization of the group's BCC channels, and the more granular physical presence in Italy than larger players, could slow down the group's activities more than peers. As such, in our base-case scenario for 2020-2021, we anticipate that higher-than-previously expected credit losses and reduced business volumes will likely strain GBCI's already modest internal capital generation. In our view, a sharp contraction of GBCI's core revenues, both net interest income and commissions, and higher credit losses could potentially trigger a net loss in 2020, before recovering some profitability in 2021, though this also depends on when the recognition of credit losses occurs.
The ratings affirmation reflects our assumption that GBCI's capitalization will be able to withstand the short-term economic shock. As such, we forecast the group's risk-adjusted capital (RAC) ratio before adjustments will likely remain comfortably above 5% over the next two years. We also anticipate that the ongoing operational integration of independent BCC members within the group will create further cost synergies, although the benefits will only be visible in the longer term.
We consider a few 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, we expect GBCI's stronger-than-peers' funding and liquidity profile will continue to support the ratings. As of June 2019, GBCI's stable funding ratio was a high 122%, according to our calculations, compared to about 105% on average for most of its European peers. This is because the BCC members' large and sticky retail customer base supports their business activity. BCC members also have a considerably larger liquidity surplus than most domestic players; and
  • Third, we believe the risks embedded in the group's loan portfolios are now comparatively lower than during the previous economic recession. This is because BCCs have since tightened their underwriting standards and have significantly deleveraged their loan portfolios (by about 35% cumulatively), having previously showed higher-than-system-average growth (40% cumulatively) before and during the beginning of the crisis (2007-2011).
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: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The negative outlook on Iccrea Banca and Iccrea BancaImpresa reflects our view that the economic contraction in the areas in which the banks operate could impair the group's overall 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 in Italy, 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 GBCI's capitalization, than we currently expect, or if that jeopardized the benefits of closer integration within the group. Similarly, although unlikely at this stage, we could lower our ratings if the group's outstanding funding and liquidity profile deteriorated.
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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