Fitch Affirms Unipol Banca at 'BB'; Outlook Stable
(The following statement was released by the rating agency) LONDON, April 10 (Fitch) Fitch Ratings has affirmed Unipol Banca S.p.A.'s Long-Term Issuer Default Rating (IDR) at 'BB' and Viability Rating (VR) at 'ccc'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATING Unipol Banca's IDRs and Support Rating (SR) reflect institutional support from its ultimate sole shareholder, Unipol Gruppo Finanziario (UGF, BBB-/Stable). Unipol Banca's Long-Term IDR is rated two notches below UGF's to reflect Fitch's view that potential for disposal is high given the limited strategic importance for the group and the bank's weak performance track record. Fitch believes that despite these factors, there is a moderate probability that the parent will provide support to the bank given regulatory requirements and our view that a default of Unipol Banca would constitute a high reputational risk for UGF as both operate in the same jurisdiction and share the same brand. To date, UGF has provided support in the form of capital injections into Unipol Banca. In Fitch's opinion, support has only been moderate in volume relative to the bank's needs, given the bank's weak asset quality. The bank benefits from technical support from its parent, and from a contractual agreement to cover the bank's losses on a number of impaired exposures. We expect this ordinary support to continue. UGF recently announced its intention to spin off most of Unipol Banca's doubtful loans into a separate company and evaluate potential strategic options for the restructured Unipol Banca. Unipol Banca's Stable Outlook is in line with that on UGF. VR Unipol Banca's VR reflects its extremely weak asset quality, which weighs on its capitalisation. The VR also reflects its weak operating performance, burdened by a high cost base, high loan impairment charges and the bank's business model, which is highly sensitive to the weak operating environment in Italy and low interest rates. Asset quality remains weak. The inflow of new non-performing exposures has stabilised, in line with the trends in the Italian banking sector. The bank's high exposure to single names and concentration in the construction and real estate sectors compared with peers render it more vulnerable to further deterioration in its loan book. Unipol Banca's new lending is more selective and the bank has strengthened its approach to resolving its asset quality problems. Coverage of impaired loans is low as the bank relies on collateral, predominantly in the form of real estate, whose value cannot be entirely relied upon since enforcement of creditors' rights in Italy is less effective than in other countries. Under an agreement with its parent, UGF provides full coverage of a number of riskier impaired exposures. However, underlying credit risk at the bank remains high. Unipol Banca's capital base is small and at risk of sudden shocks in asset performance. Capital encumbrance by unreserved impaired loans is high at above 200% of Fitch Core Capital (FCC) at end-June 2016, including UGF's indemnities, which in Fitch's opinion is unsustainable and puts the bank at risk of a capital shortfall. Fitch believes that UGF will likely continue to provide capital if the need arises, but the bank's regulatory capital ratios remain weak and with tight buffers above minimum regulatory requirement. Unipol Banca's operating profitability is structurally weak, driven by weak revenue generation from its core businesses, high operating costs and material pressure from loan impairments. Unipol Banca returned to profitability in 2015 after being loss-making for several years; but Fitch believes that reported profitability benefits from the bank's low coverage of impaired loans, which reduces loan impairment charges. We believe that it will be difficult for the bank to generate sustainable profit as its franchise and pricing power are weak and because it has been unable to generate significant synergies from its parent. Unipol Banca's funding and liquidity reflect its business model and mainly depends on its customer base, which has been less stable than other regional Italian banks. Customer deposits have been increasing in recent years and accounted for about 70% of total non-equity funding. However, churn rate is relatively high, which means that these customers do not regularly bank with Unipol Banca and make its funding vulnerable to depositors' sentiment. The bank has regularly placed bonds to retail investors, but Fitch expects that these will be reducing as bail-in legislation has come into force. The bank's standalone liquidity profile is moderately improving, but UGF's ability to provide liquidity remains important for the bank. RATING SENSITIVITIES IDRS, SR Unipol Banca's IDRs and SR are sensitive to a change in UGF's ability and propensity to support its subsidiary. This means that the bank's ratings and Outlook are primarily sensitive to changes in UGF's ratings. The ratings would also be affected by any change in our assessment of UGF's propensity to support Unipol Banca. A sale of the bank or a reduction in UGF's stake in it would likely diminish the parent's propensity to provide support. VR A material deterioration of asset quality and capitalisation would likely result in a downgrade of Unipol Banca's VR. The rating is also sensitive to liquidity pressures. An upgrade would require a material improvement in asset quality, a stronger capitalisation of the bank and a sustainable improvement of its structural profitability. The rating actions are as follows: Long-Term IDR affirmed at 'BB'; Outlook Stable Short-Term IDR affirmed at 'B' Viability Rating affirmed at 'ccc' Support Rating affirmed at '3' Contact: Primary Analyst Fabio Ianno Director +44 20 3530 1232 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Valeria Pasto Associate Director +39 02 87 90 87 298 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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