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Moody's affirms Banca Nazionale del Lavoro Baa2/P-2 ratings

July 29, 2014



-- Moody's Investor Service has today affirmed Banca

Nazionale del Lavoro SpA's (BNL) long-term deposit and issuer ratings of

Baa2 with stable outlook, as well as the bank's Prime-2 short-term

deposit rating. Moody's also lowered BNL's standalone bank financial

strength rating (BFSR) to D, which is equivalent to a standalone baseline

credit assessment (BCA) of ba2. The outlook on the standalone BFSR was

changed to stable from negative.

BNL is a fully owned subsidiary of BNP Paribas (BNPP rated A1/Prime-1

negative, C-/baa1 negative).

RATINGS RATIONALE

--- DEPOSIT RATING

Moody's affirmation of BNL's Baa2 deposit rating incorporates three

notches of uplift from the bank's standalone BCA of ba2, reflecting the

rating agency's unchanged expectation of a very high probability of

parental support from BNPP in case of need and a high probability of

systemic support.

The Outlook for BNL's deposit rating is stable, reflecting the credit

strength of its parent and Moody's anticipation that, given the very high

expectation of parental support, a one notch downgrade of BNPP's baa1 BCA

would not affect the rating of the bank.

--- LOWERING OF THE BCA

Moody's says that the lowering of the standalone BCA reflects the

evolution of the bank's profitability, capital adequacy and asset

quality, against the backdrop of the still challenging operating

environment in Italy. The stable outlook reflects expectation of limited

deterioration of these from the current level, and also takes into

account the reduction in non-performing loans, following a sale to the

parent.

In Moody's view, the key drivers supporting BNL's current standalone

rating include the bank's domestic footprint, its earning diversification

and the predictability of its business. Over the past five years, BNL has

maintained stable profitability, primarily because of the absence of

goodwill write-offs seen in other Italian banks, modest impairments on

the securities portfolios and a manageable cost of risk. In contrast to

the majority of Italian rated peers, BNL has not used additional carry

trades to boost its net interest income in the past two years, and did

not realise any material capital gain from the sale of government bonds

in 2013. Bottom line results have however been modest for a bank of this

size, but it should be noted that the results in the annual report do not

fully reflect BNL's profitability. This is because some revenues are

booked at parent level, while costs are recorded by the subsidiary.

With regard to capital adequacy, Moody's notes that BNL's regulatory

ratios are below those of peers and the banking system average. The

rating agency however says that this is commensurate with the current

rating level. In December 2013, BNL obtained the Bank of Italy's

approval to use the Advanced internal ratings based (IRB) model for

non-financial companies, public entities and central bank portfolios (see

Note 1).

BNL's adoption of the IRB model and the sale to BNPP of a EUR3.4 billion

portfolio of non performing loans (NPLs) (see Note 2) -- which was

entirely composed of NPLs to corporates, led to (1) a 19.3% year-on-year

contraction in risk-weighted assets; and (2) an increase in the Core Tier

1 (CT1) ratio (2013: 9% 2012: 7.7%). Notwithstanding this increase, the

bank's CT1 ratio remained well below the 10.5% Italian average over the

period 2012-13 (see Note 3). However, when considering the bank's

financial leverage -- calculated as total assets net of intangible assets

as a proportion of Tier 1 capital -- BNL is in a stronger position, with

a ratio of 15.2x versus the banking system average of 18.5x.

BNL's asset quality metrics have declined in recent years, although

coverage levels have remained superior to those of the system. BNL

reported a 12% problem loan ratio (see Note 4) at year-end 2013, in line

with 12.3% for the system, albeit higher than the peer median. Including

the portfolio of NPLs sold to its parent, Moody's estimates that the

ratio would have been 16.2%, much higher than the system average.

However, the agency notes that the sale of the NPLs portfolio has

reduced BNL's credit risk on a structural basis because the majority of

NPLs now relate to retail and small businesses, which are generally more

granular and benefit from a higher level of collateralisation. BNL's loan

loss coverage -- at 62.3% -- was better than the 59.1% system average.

However, problem loans-to-the sum of shareholders' equity plus loan loss

reserve ratio -- at 77.3% in 2013 vs 82.5% in 2012 -- was slightly higher

than the 73.7% ratio for the system and the 62% peer median.

BNL has one of the Italian banking system's highest loan-to-deposit

ratios and an above-system average dependence on European Central Bank

funding (16.6% of total funding). Parent funding is the second most

important funding source (17.7% of total funding). The bank's liquidity

profile is comfortable. As of year-end -2013, BNL had a loan-to-deposit

ratio of 154.6%, significantly improved compared to 170.6% in the

previous year, driven by the 7.4% contraction in loan volume and 1.8%

increase in customer deposits. Despite this improvement, the ratio

remains far from the 112.6% system average and 113% peer median. If

parental funds are included in the ratio, the bank's loan-to-deposit

ratio would decline to a more balanced 118%.


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Source: EMBIN (Emerging Markets Business Information News)


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