Banco BPM : Stabilised but still fragile credit profile

Publication date 19/02/2018 15:48 - Writing date 19/02/2018 15:10 - - - - / - Q1 2018 results on 2 May - H1 2018 results on 3 August. - Nine-month 2018 results on 7 November - - - - In 2017 Banco BPM successfully completed a large part of its extensive internal reorganisation launched at the start of the merger of Banco Popolare and Banca di Milano. Businesses have been streamlined and refocused. Expected headcount and cost reductions are well on track and have helped to improve profitability. - Yet, as for other Italian banks, Banco BPM's management of its large volume of NPL will be the focus of attention. The programme went ahead as planned in 2017 and will ramp up under pressure from the ECB. The aim is to reduce the gross NPL ratio from 21.1 to 11.5% in 2020. Banco BPM's portfolio structure (large proportion of secured loans), the economic recovery in Italy, authorities' resolve develop a secondary market and the development of companies in acquiring NPL portfolios, etc. suggest that Banco BPM should be able to complete its NPL disposals programme while maintaining a CET1 ratio of 12%, above the regulator's requirements. Note however the bank will need to issue an AT1, without which the estimated distance to regulatory requirements will be limited in 2019. The ECB's reaction remains unknown: will the new plan suffice knowing that other banks have announced gross NPL ratio targets of 10%? - Given the uncertainty surrounding the approval of the new plan, the stress that the new ECB/EC NPL proposals could cause in the markets and the Italian elections on 4 March, we have a Reduce recommendation on the Tier 2 bonds in the short term. - We have a Buy recommendation on the issuer's senior bonds 2019/2020 (2.75% 2020 paper offers ASW+95bp, or a yield of 0.9%). - - > - Support factors - - A top-notch franchise in northern Italy with 10%-plus market share. - A wide range of low-priced products for its mostly corporate clientele, produced internally or distributed via recently negotiated long-term partnership agreements (Anima/Cattolica). - Strengthened capital ratios, reflected in a comfortable CET1 ratio vs. a 2018 SREP of 8.875%, representing a distance of 348bp. - The Italian economic recovery, with GDP growth forecast above 1.1%, is a driver of business and underpins the return of non-performing loans to the performing category. - Points to watch - - Asset quality is weak with a very high gross NPL ratio of 21.1%. The group aims to reduce its gross NPL from € 30bn in 2016 to € 13bn in 2020, or a € 17bn reduction in NPL, € 10bn above what was planned in the initial plan (2019 - € 23.2bn of NPL). At 13 December 2017 € 5bn of NPL was offloaded.- Profitability is weak but should be buoyed by the unlocking of revenue and cost synergies. However, a higher cost of risk could jeopardise the 2019 net profit target of € 1bn. - Access to bond markets is key. To maximise the capital structure and comply with the MREL, AT1 and Tier 2 issuances are expected in the months ahead. In net terms, the overall issuance volume should be negative, reducing funding costs.-The European Commission and ECB's proposals in the weeks ahead to speed up balance sheet clean-up in Europe will be key. Overly demanding demands and tight deadlines would be incompatible with Banco BPM's current solvency position and would require shoring up its capital ratios.