Fitch Ratings has assigned
A full list of rating actions is provided below.
Fitch's assessment of Mediolanum is based on the Bank Rating Criteria complemented by the Non-Bank Financial Institutions (NBFI) Rating Criteria for Business Profile, Asset Quality and Earnings and Profitability due to the bank's business model.
Key Rating Drivers
IDR and VR
VR Drives Rating: Mediolanum's Long-Term IDR is driven by its standalone credit profile as reflected in its VR. Mediolanum's ratings reflect the bank's business profile as the seventh-largest asset gatherer in
Traditional lending activities are ancillary to Mediolanum's core asset-management business. The ratings also consider the bank's sound funding and liquidity and adequate capitalisation. This is counterbalanced by Mediolanum's high risk concentration on Italian sovereign debt and by its appetite for credit risk (although its lending is limited and of low risk), compared with pure asset gatherers with little-to-no use of their own balance sheets.
Established Business Profile: Mediolanum provides investment solutions to Italian households through a network of financial advisors ('family bankers') with an adequate market share domestically and a focus on the affluent retail segment. Mediolanum's franchise has grown over the last 40 years and benefits from good reputation and a high clientele retention rate.
Stable Business Model: Mediolanum's business model is stable and generates recurrent and sound profitability. The latter is attributable to its vertical integration (ie. fully owning the fund platforms and the distribution network), resulting in almost 90% of its assets under management (AuM) being managed internally, and its focus on households, which is a more profitable segment than institutional customers. Investment products are well-diversified and partly sold as insurance products originated by fully-owned insurance subsidiaries.
Stable Senior Management, Consistent Strategy: Senior management has depth and experience and Mediolanum's strategic direction remains coherent with its business model. The strategy is clear and focuses mainly on the domestic market and leverages on its product offering. Stable governance, benefitting from two large longstanding shareholders and from a long-serving management team mitigating key-person risks, underpin the bank's ability to deliver on its stated targets.
Moderate Risk Profile: Mediolanum's risk profile from asset gathering and investment management is moderate and supported by an adequate operational risk framework. In our assessment we also consider credit risk from its lending exposure, which is limited versus commercial banks' (about 20% of end-2021 total assets with an impaired loans ratio of 1.3% at end-2021) but an additional source of risk than purely asset managers. However, Mediolanum's lending is largely low-risk, mostly residential mortgage and salary-backed loans.
Very High Sovereign Debt Exposure: Exposure to Italian sovereign bonds accounted for about 6x the bank's common equity tier 1 (CET1) capital at end-2021, which results in high counterparty-risk concentration and is also an important consideration in our risk-profile assessment. Above 90% of Italian government bonds are accounted for at cost, mitigating market risk and potential regulatory capital volatility.
Commission-Driven Business: The bank's operating profit to risk weighted assets (8% in 2021) is well above that of Italian banks, due to a low balance-sheet risk-weight density stemming from its business model. Mediolanum's revenue profile is driven by commissions from asset management, which accounted for about 80% of total operating income in 2021. More than 90% of operating income comes from Italian activities, while banking activities contribute less than 10%.
For 2022, we expect revenue to increase slightly as overall performance will likely be affected by less benign market conditions than in 2021, but we expect NNM volumes to offset negative market- valuation effects.
High-Margin Business: We complement our assessment of the bank's profitability by looking at NNM flows and margins. Mediolanum's high margin reflects its vertical integration of asset gathering and investment management. Additionally, Mediolanum's established franchise and loyal clientele support a strong record of NNM flows through several cycles, including during the pandemic, which we expect to continue, despite current market volatility, supporting revenue generation.
Some contribution will come from
Adequate Capitalisation: Capitalisation provides sound buffers over regulatory requirements relative to Mediolanum both as the financial conglomerate and as the bank. At end-1Q22, the capital buffer of the financial conglomerate was nearly 25% above the requirement, while the banking group's CET1 ratio of 21% was well above the requirement of 7.67%. Our assessment of Mediolanum's capitalisation also considers the high capital encumbrance by Italian government bonds and our expectation that the bank will maintain sound capital buffers over the medium term.
Sound Funding Profile: Our assessment of Mediolanum's funding and liquidity profile considers its sound structural liquidity position driven by its business model. While the bank's funding is less diversified than commercial banks', it benefits from a stable deposit base that funds considerably in excess of its lending. We expect some funding diversification as the bank builds its resolution buffers with some junior debt buffers.
The bank's Short-Term IDR of 'F3' is the baseline option for a Long-Term IDR of 'BBB' because its 'bbb' funding and liquidity score is not high enough to achieve a higher Short-Term IDR.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch could downgrade Mediolanum's ratings if
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside to the ratings is currently limited by the domestic operating environment, as reflected also in
An upgrade would require an upgrade of
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Deposit Ratings
Mediolanum's Long-Term Deposit Rating is rated one notch above the Long-Term IDR to reflect full depositor preference in
The Short-Term Deposit Rating of 'F2', is the baseline option for a 'BBB+' Long-Term Deposit Rating because the funding and liquidity score is not high enough to achieve the higher short-term deposit rating.
Fitch has assigned a Government Support Rating of 'no support' to Mediolanum, which reflects our 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 in the event that the bank becomes non-viable.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Deposit Ratings
Mediolanum's deposit ratings would be downgraded if the Long-Term IDR is downgraded. The deposit ratings could also be downgraded by one notch, and be aligned with the IDRs, in the event the bank no longer complies with current and future MREL requirements.
Mediolanum's deposit ratings would be upgraded if the Long-Term IDR is upgraded.
An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The earnings and profitability score of 'bbb+' has been assigned below the 'a' category implied score due to the following adjustment reason: risk-weight calculation (negative).
The capitalisation and leverage score of 'bbb-' has been assigned below the 'a' category implied score due to the following adjustment reasons: leverage and risk-weight calculation (negative) as well as risk profile and business model (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Date of Relevant Committee
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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