S&PGR Affirms Veneto Banca ‘B/B’ Ratings; Outlook Negative

Press Release: S&PGR Affirms Veneto Banca ‘B/B’ Ratings; Outlook Negative

 
 
The following is a press release from Standard & Poor's: 
 
     -- On June 30, 2016, Veneto Banca SpA (Veneto) announced the completion 
of its EUR1 billion capital increase, almost entirely subscribed by the Atlante 
fund after the failure of the IPO. 
     -- As we expected, Veneto's capital adequacy has gradually improved from 
its previously weak level. 
     -- We are therefore affirming the 'B/B' long- and short-term counterparty 
credit ratings on Veneto. 
     -- The negative outlook mainly reflects our view of the risks related to 
the bank rebalancing its funding and liquidity profile and reporting higher 
losses than currently expected. 
 
MADRID (S&P Global Ratings) July 7, 2016--S&P Global Ratings today affirmed 
its 'B/B' long- and short-term counterparty credit ratings on Italy-based 
Veneto Banca SpA (Veneto). The outlook remains negative. 
 
The rating affirmation follows Veneto's announcement that it has completed its 
EUR1 billion capital increase, enabling it to comply with regulatory 
requirements and achieve a risk-adjusted capital (RAC) ratio of more than 5%. 
Consequently, we revised upward the bank's stand-alone credit profile (SACP) 
to 'b' from 'b-'. However, our revised assessment of Veneto's SACP has no 
effect on the rating since we are removing the notch of positive adjustment 
that had already factored in the success of Veneto's capital strengthening 
exercise. 
 
The capital strengthening was part of an initial public offering (IPO) 
launched at the beginning of June 2016, which failed to attract investors' 
interest--only about 2% of shares were ultimately subscribed--and also failed 
to secure the minimum free float for a listing on the Italian stock exchange. 
On June 30, Veneto was able to complete the capital increase thanks to the 
intervention of the newly created Atlante fund. While the unsuccessful market 
listing reflects poor market conditions in addition to the bank's weakened 
franchise, profitability, asset quality, and outstanding legacy risks, we view 
positively the arrival of Atlante. We expect the new shareholder to support 
Veneto's current strategic plan and to help its customer franchise 
stabilization. 
 
Following the EUR1 billion additional capital injection, Veneto's common equity 
tier I reached 11.22%, so above the 10.25% regulatory requirement under the 
supervisory review and evaluation process (SREP). We consider that the bank 
will be able to maintain a RAC ratio of between 5.0% and 5.5% in the next 12 
months. This is despite the fact that we expect Veneto to remain lossmaking in 
2016 due to pressure on revenues and still-high cost of risk. We forecast 
gradual operating income improvement only in 2017 on the back of declining 
cost of risk. While the bank's weak profitability hampers the possibility of 
building up capital organically, we consider that Veneto will continue its 
deleveraging effort and accelerate the sale of non-core assets. 
 
Although the bank managed to reach a Basel III liquidity coverage ratio (LCR) 
of about 80% as of March 2016, from 53% at end-2015, it experienced further 
funding outflows since then dragging the LCR again below regulatory minimum. 
Specifically, total customer deposits--which we consider to be the bank's core 
business and a stable funding source--declined by more than 17% in the first 
quarter of 2016 and this trend continued, though at slower pace, in the second 
quarter. We understand the outflows have now stopped and Veneto's liquidity 
position has improved following the bank's capital increase. Despite that, in 
our view, sustained improvements in the bank's funding and liquidity position 
will require material progress in the bank's franchise and risk profile. 
 
We remain cautious about the bank's risk profile given its weak asset quality 
metrics and legacy risks (mainly legal and regulatory claims). At end-March 
2016, the nonperforming asset ratio reached as high as 30% of gross customer 
loans, well above the average for Italian banks, while coverage remained 
relatively low at around 35%. Although new inflows have been decreasing since 
last year, we expect the stock of impaired loans to keep growing until 2020, 
barring any expected sale of nonperforming loans (NPLs). This level of NPLs 
will continue to constrain both business development and profit generation in 
the next two years. 
 
The negative outlook reflects the possibility that we could lower the 
long-term rating on Veneto in the next 12 months if the bank fails to 
strengthen its funding and liquidity metrics as we currently expect. For 
example, this could happen if the bank does not maintain an LCR sustainably 
above regulatory minimum, its reliance on short-term funding remains high, or 
it experiences further customer deposits outflow. Moreover, we could also 
lower our rating if the bank reports higher losses, thereby pressuring the RAC 
ratio. This could occur if the bank fails to reach financial targets outlined 
in its business plan restructuring, asset quality metrics weaken, the 
projected economic improvement in Italy falters, or material regulatory and 
litigation risks materialize. 
 
We could revise the outlook to stable over our outlook horizon if Veneto were 
to successfully reinforce its financial profile by achieving a more 
sustainable funding and liquidity profile and stabilize its client franchise 
while showing a gradual profitability improvement. 
 
RELATED CRITERIA AND RESEARCH 
 
Related Criteria 
     -- Criteria - Financial Institutions - Banks: Bank Hybrid Capital And 
Nondeferrable Subordinated Debt Methodology And Assumptions - January 29, 2015 
     -- Criteria - Financial Institutions - Banks: Quantitative Metrics For 
Rating Banks Globally: Methodology And Assumptions - July 17, 2013 
     -- Criteria - Financial Institutions - Banks: Revised Market Risk Charges 
For Banks In Our Risk-Adjusted Capital Framework - June 22, 2012 
     -- Criteria - Financial Institutions - Banks: Banks: Rating Methodology 
And Assumptions - November 09, 2011 
     -- Criteria - Financial Institutions - Banks: Banking Industry Country 
Risk Assessment Methodology And Assumptions - November 09, 2011 
     -- Criteria - Financial Institutions - Banks: Bank Capital Methodology 
And Assumptions - December 06, 2010 
     -- Criteria - Financial Institutions - Banks: Methodology For Mapping 
Short- And Long-Term Issuer Credit Ratings For Banks - May 04, 2010 
     -- Criteria - Financial Institutions - Banks: Commercial Paper I: Banks - 
March 23, 2004 
     -- General Criteria: Methodology: Use Of 'C' And 'D' Issue Credit Ratings 
For Hybrid Capital And Payment-In-Kind Instruments - October 24, 2013 
     -- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 
'CC' Ratings - October 01, 2012 
     -- General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009 
 
Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All 
ratings affected by this rating action can be found on the S&P Global Ratings 
public website at www.standardandpoors.com. Use the Ratings search box located 
in the left column.  Alternatively, call one of the following S&P Global 
Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office 
(44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; 
Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. 
 
Primary Credit Analyst: Antonio Rizzo, Madrid (34) 91-788-7205; 
                        Antonio.Rizzo[a]spglobal.com 
Secondary Contact: Luigi Motti, Madrid (34) 91-788-7234; 
                   luigi.motti[a]spglobal.com 
 
 
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Press Release: S&PGR Affirms Veneto Banca ‘B/B’ -2-

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