MILAN Oct. 29, 2020--S&P Global Ratings today affirmed its 'BBB/A-2' long- and short-term issuer credit ratings on Italy-based Intesa Sanpaolo SpA (Intesa) and its core subsidiaries, UBI Banca and Fideuram - Intesa Sanpaolo Private Banking SpA (Fideuram ISPB). The outlook on the long-term ratings remain negative.
We also affirmed all other ratings on these banks.
The affirmations follow the recent rating action on Italy (see "Italy Outlook Revised To Stable From Negative; Ratings Affirmed At 'BBB/A-2'"), as well as our updated macroeconomic view of Italy. We consider that the outlook revision on Italy to stable removes a risk for the ratings on Intesa as we believe that Intesa could not be rated above the sovereign, given its large concentration in Italy and exposure to Italian economic risk. Conversely, further evolution of the pandemic in Italy and the potential introduction of new restrictive measures could heighten pressure on Italy's ongoing recovery in the coming months, and constrain our existing forecast. This would be particularly detrimental for the recovery of Italian banks' asset quality. We currently project that Italian GDP will fall by 8.9% in 2020, gradually bouncing back from 2021 and 2022 and returning to 2019 levels only in 2023.
Despite the material pressure on earnings in 2020 and 2021, we anticipate that Intesa will be able to keep its risk-adjusted capital (RAC) ratio sustainably above 5% while also maintaining better asset quality metrics than peers. As we flagged when the UBI takeover completed, we maintain our view that the integration of UBI will not have a meaningful effect on the group's creditworthiness. Compared to most Italian banks, we believe that Intesa will benefit from stronger earnings resilience due to its more diversified business model and better operating efficiency that result from large economies of scale and cost-containment measures.
We also anticipate that Intesa's asset quality deterioration will remain manageable overall. Like the previous economic recession, Intesa's good loan diversification by sector should help maintain lower-than-system average inflows of nonperforming exposures (NPEs).
Nevertheless, the negative outlook reflects our view that the material risks to Intesa's credit profile linked to the COVID-19-induced downturn have not abated. We see a risk that the economic rebound in Italy might take longer than currently expected or fiscal countermeasures introduced by the government prove less effective than anticipated.
The negative outlooks on Intesa and its core subsidiaries Fideuram and UBI Banca primarily reflect heightened pressure on the group's revenue and asset quality, as well as significant risks we see to our base-case expectations over the next two years.
In our base-case scenario, we anticipate that Intesa's profitability will continue to outperform the Italian financial system average, enabling it to absorb the effect of higher credit losses amid more difficult domestic economic conditions, while preserving its RAC ratio comfortably above 5% over the next 18-24 months.
We could lower the ratings over the next 12-24 months if we observed further material deterioration in economic and operating conditions in Italy, either because the downturn is deeper and longer, or the recovery weaker, than we currently anticipate, thus potentially triggering a substantial weakening of Intesa's asset quality, capital, and profitability.
We could revise the outlook back to stable if we were to see easing domestic economic conditions and/or diminished risks to our expectations.
We do not assign outlooks to bank issue ratings. However, we will continue to notch down the ratings on Intesa's hybrids from the lower of the stand-alone credit profile (SACP) and issuer credit rating (ICR). Therefore, if we were to lower the ratings on Intesa, we would also lower the ratings on the bank's rated additional Tier 1 and Tier 2 instruments.
For UBI Banca, we notch down the ratings on its hybrids from its ICR that is currently aligned to that of its parent, Intesa. Therefore, if we were to lower the ratings on Intesa and consequently on UBI Banca, we would also lower the ratings on the bank's additional Tier 1, Tier 2, and senior nonpreferred instruments.