UBI Banca Ratings Remain On CreditWatch Positive Pending Intesa Acquisition, Despite Impact Of COVID-19

  • 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 UBI Banca's loan loss provisions and ensuing pressure on capitalization. This, coupled with its better-than-peers' underwriting standards, will likely support its creditworthiness, in our view.
  • Nevertheless, we believe that downside risks to UBI's asset quality and earnings remain material, taking into account the bank's high exposure to the areas most affected by COVID-19 in Italy, in our view.
  • At the same time, Intesa Sanpaolo is taking steps to initiate the announced exchange offer to acquire 100% of UBI.
  • We are therefore maintaining all ratings on UBI on CreditWatch with positive implications.
  • The ongoing CreditWatch placement continues to reflect that we could raise the ratings by one notch to match our ratings on Intesa if we perceived that the tender offer would be finalized and the deal completed in line with the terms presented, assuming other factors remain unchanged.
MILAN (S&P Global Ratings) March 26, 2020--S&P Global Ratings today kept its 'BBB-/A-3' long- and short-term issuer credit ratings on Italian UBI Banca SpA on CreditWatch with positive implications, where they were placed on Feb. 19, 2020. The issue ratings on debt instruments issued by the bank also remain on CreditWatch positive.
The ongoing CreditWatch placement reflects our expectation that, if the tender offer launched by Intesa to acquire 100% of UBI's shares is successful, we would consider that UBI had become an integral part of the Intesa group, and would therefore align the ratings on UBI with those on Intesa. The potential upside from an acquisition by a higher rated bank offsets the material uncertainties about UBI's financial profile associated with the economic fallout from the COVID-19 pandemic.
We acknowledge that Intesa is proceeding with its plan that it laid out when it launched the offer on Feb. 17, 2020. Nevertheless, we maintain our view that the proposed acquisition is not a certainty. The offer is subject to Intesa acquiring at least 66.67% of UBI's share capital, although Intesa retains the right to waive this condition if it acquires over 50% of UBI's capital. So far, shareholders that account for about 20.4% of UBI's capital have publicly stated that they do not intend to accept the offer.
At the same time, the sharp reduction in Italian economic activity we anticipate in 2020 and the material uncertainties associated with the COVID-19 pandemic could affect UBI's financial profile, in our view. We generally believe that small-to-midsize regional banks with loan concentrations to SMEs or concentrated 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 longer and deeper the economic contraction, the more this could impair UBI's asset quality, increase credit losses, and reduce business and revenue generation, ultimately eroding its capital. This also stems from the bank's relatively modest business and revenue diversification compared to some larger and stronger domestic peers and its large presence in the most affected areas in Italy. UBI's loan market share was 10.4% in Lombardy and 23%-24% in the provinces of Bergamo and Brescia as of Sept. 30, 2019.
We expect the current situation will meaningfully affect the bank's earnings in 2020 and 2021, depending on when the recognition of credit losses occur. We anticipate that the bank might be loss-making in 2020 due to sharply rising loan loss provisions, though earnings are likely to recover in 2021. This primarily reflects the likely rise in the bank's stock of nonperforming exposures (NPEs) and the contraction of core revenues, both net interest income and commissions. Based on these assumptions, we forecast that UBI's risk-adjusted capital (RAC) ratio will remain slightly above 5% over the next two years. As such, we think that UBI's capitalization will be able to withstand the economic shock, albeit with a limited cushion.
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, the bank's conservative approach and prudent underwriting standards have enabled UBI to record lower than system inflow in NPE inflows during last crisis. It also has fewer legacy asset quality issues than most other midsize banks, with net NPEs to total adjusted capital of around 56% as of year-end 2019 compared to 50%-80% for most of its peers; and
  • Third, the great diversification by industry, with contained exposure to the sectors that we think will likely suffer the most such as tourism and related activities (at about 3.1% of its portfolio as of Dec. 2019) and transport (at about 2% of its portfolio as of Dec. 2019).
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.
We will monitor developments related to the merger and we aim to resolve the CreditWatch placement once it is clear that the transaction will close. We anticipate that this would occur after the planned settlement of the exchange offer at the end of July 2020.
If we perceived that the tender offer would likely be finalized and the deal completed in line with the terms presented, we could raise the ratings on UBI by one notch to match our rating on Intesa, assuming other factors remain unchanged.
A positive rating action on UBI would likely trigger a similar action on the bank's long-term resolution counterparty rating (RCR) and hybrid instruments, including its existing additional Tier 1, subordinated debt, and senior nonpreferred notes.
If the transaction does not complete, we could resolve the CreditWatch placement by affirming the ratings on UBI, if other factors remain unchanged. That said, in this scenario, we would also consider the potential impact of the economic contraction in the areas in which the bank operates impairing its financial profile more than we currently anticipate over the next 12-18 months.
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