Rating Action Commentary
ֳ Upgrades Banco Desio to 'BBB-'; Outlook Stable
Thu 15 May, 2025 - 12:17 PM ET
ֳ - Milan - 15 May 2025: ֳ has upgraded Banco di Desio e della Brianza S.p.A.'s (Desio) Long-Term Issuer Default Rating (IDR) to 'BBB-', from 'BB+', and Viability Rating (VR) to 'bbb-', from 'bb+'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is below.
The upgrade reflects Desio's record of consistent strategic execution over the past five years, which has allowed it to achieve adequate revenue diversification, making its profitability more resilient to a lower interest rate environment. The bank has improved its financial metrics, bringing asset quality in line with the domestic industry average and building comfortable capital buffers over regulatory requirement.
The upgrade also factors in our improved assessment of the operating environment for Italian banks, which should support Desio's business prospects and financial performance.
Key Rating Drivers
Small Bank, Improved Financial Profile: Desio's ratings reflect its adequate diversification in fee-generating activities, despite a small and geographically concentrated franchise. The ratings are underpinned by the bank's improved financial metrics, including asset quality in line with the domestic industry average, structurally improved profitability, adequate capitalisation and stable deposit-based funding.
Adequately Diversified Regional Bank: Desio is a small Italian bank focused on lending to retail, small business and SME customers, mainly in some wealthy areas of northern Italy. Its business model is more diversified than most similarly sized banks, due to Desio's consumer lending activities and well-established distribution of wealth management and insurance products. The bank has consistently met its financial targets, including asset quality de-risking, fee income growth and business expansion from the acquisition of consumer finance assets and bank branches.
Moderate Risk Profile: We believe that Desio's underwriting standards and risk control adequately mitigate risks arising from its small business, SME and consumer lending activities. High loan fragmentation also reduces risks arising from idiosyncratic or sector-wide asset quality issues. Interest rate risk is moderate and adequately managed.
Average Asset Quality: Desio's impaired loans ratio of 3.2% at end-March 2025 was manageable and broadly in line with domestic and southern European banks' average. ֳ expects the bank to mitigate asset quality pressures with further sales of impaired loans and effective workouts, resulting in impaired loans unlikely to materially exceed 3.5% in 2025-2026. Above-sector average impaired loan coverage of about 80% further mitigates asset quality risks.
Improved Earnings Generation Capacity: Desio's operating profitability/risk-weighted assets (RWAs) ratio was 2.3% in 2024 (2023: 1.8%), which is adequate and materially above the bank's historical average. The ratio benefited from higher interest rates, adequate fee generation and reduced loan impairment charges. However, the bank's small size prevents it from achieving meaningful economies of scale and is a drag on profitability.
Adequate Capitalisation, Sovereign Exposure: Desio's common equity Tier 1 (CET1) ratio of 17.6% at end-March 2025 provided adequate capital buffers. We expect it to manage capitalisation prudently, even in case of further acquisitions of branches or specialised entities. Capitalisation remains exposed to concentration risk arising from Italian government bonds accounting for a high, 2.1x of CET1 capital. However, volatility to regulatory capital is mitigated by most debt securities being accounted at amortised cost.
Deposit-Based Funding, Sufficient Diversification: Desio's funding primarily relies on a stable and granular base of customer deposits, the size of which nearly matches its loan book (average loans to deposits ratio of 108% in 2021-2024). Diversification in wholesale funding sources is lower than larger domestic peers but has increased in the past five years through the issuance of covered bonds, asset-backed securities and unsecured senior preferred bonds placed through the bank's network. Liquidity is adequate and prudently managed.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Desio's ratings are sensitive to a significant weakening of the operating environment in Italy. This could be due to much slower economic growth than our forecasts, which could result in higher default rates and lead to deterioration in asset quality, earnings and capital metrics.
The ratings could be downgraded if the impaired loans ratio sustainably increases above 4% and the bank fails to maintain operating profit above 1.5% of RWAs on a sustained basis, especially if this translated into weakening internal capital generation with the CET1 ratio falling below 14%, without the prospect of recovery in the short term.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade would require an improved assessment of Italy's operating environment and Desio to materially grow its franchise or improve the diversification of its business model within a conservative risk appetite. For this to be rating positive, it would have to result in operating profit/RWAs of around 3% on a sustained basis, while reducing the impaired loans ratio to below 2.5% and maintaining a prudent CET1 ratio of at least 16%, or materially reducing capital encumbrance by Italian government bonds.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Desio's long-term deposits rating is one notch above its Long-Term IDR to reflect our expectation that default risk on the bank's deposits is lower than reflected by the IDR due to full depositor preference in Italy and Desio being subject to and expected to comply with binding minimum requirement for own funds and eligible liabilities (MREL) in excess of regulatory capital requirements.
The short-term deposit rating of 'F3' is the lower of two possible ratings for a 'BBB' long-term deposit rating under ֳ's rating correspondence table, as Desio's funding and liquidity score is not high enough to assign the higher option.
Desio's Government Support Rating (GSR) of 'no support' (ns) reflects ֳ's view that, although external extraordinary sovereign support is possible, it cannot be relied on. Senior creditors can no longer expect to receive full extraordinary support from the sovereign if the bank becomes nonviable. This is because the EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that requires senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The deposit ratings are primarily sensitive to changes in the bank's Long-Term IDR.
The deposit ratings could also be downgraded if Desio is no longer subject to or expected to comply with MREL in excess of regulatory capital requirements.
An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. In ֳ's view, this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The operating environment score of 'bbb' is below the 'a' implied category score due to the following adjustment reason: sovereign rating (negative).
The business profile score of 'bbb-' is above the 'bb' implied category score due to the following adjustment reason: business model (positive).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Banco di Desio e della Brianza S.p.A. | EU Issued, UK Endorsed |