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Full text: Moody’s downgrades Italian banks

Editor’s note: On the heels of a sovereign downgrade, the following press release was issued by Moody’s Investors Service today in conjunction with its ratings review of several Italian banks.

Milan, July 16, 2012 — Moody’s Investors Service has today downgraded by one to two notches the long-term debt and deposit ratings for 10, and the issuer ratings for 3, Italian financial institutions, prompted by the weakening of the Italian government’s credit profile, as captured by Moody’s downgrade of Italy’s government bond rating to Baa2 from A3 on 13 July 2012. The long-term debt and deposit ratings of one bank were affirmed.

Please click this link (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143798) for the list of Affected Credit Ratings. This list is an integral part of this press release and identifies each affected issuer. For additional information on bank ratings, please refer to the webpage containing Moody’s related announcements: http://www.moodys.com/bankratings2012.

Details of the ratings rationale for each affected bank is provided below.

RATINGS RATIONALE

Today’s actions follow the weakening of the Italian government’s credit profile, as captured by Moody’s downgrade of Italy’s government bond rating to Baa2 from A3, with a negative outlook. For more details on the rationale for the sovereign downgrade, refer to the press release "Moody’s downgrades Italy’s government bond rating to Baa2 from A3, maintains negative outlook", published on 13 July, 2012 (http://www.moodys.com/research/Moodys-downgrades-Italys-government-bond-rating-to-Baa2-from-A3–PR_250567).

The ratings declined by one notch for 7 of the affected institutions, and by two notches for remaining 6. The short-term ratings for 3 banks have also been downgraded by one notch, triggered by the long-term ratings changes.

Along with the increase in the risk of sovereign bond defaults, the downgrade of Italy’s long-term ratings to Baa2 also indicates a similarly increased risk that the government might be unable to provide financial support to its banks in financial distress. As a consequence, Italian banks with standalone ratings at or close to the Baa2, and higher debt and deposit ratings as a result of an expectation of systemic support , have seen the support uplift in their debt ratings reduced by one or two notches.

The reduced expectation of systemic support that prompted today’s rating actions follows downgrades of several Italian banks taken on 14 May, 2012 ("Moody’s downgrades Italian banks; outlooks remain negative" http://www.moodys.com/research/Moodys-downgrades-Italian-banks-outlooks-remain-negative–PR_244732). The revised standalone credit assessments announced on 14 May were set to be resilient to a degree of further stress, and reflected the banks’ substantial exposures to the Italian economy and the Republic’s credit worthiness. As a result, those earlier actions largely limited the extent of the rating actions taken today to changes in the credit enhancement associated with systemic support. Accordingly, the standalone ratings, in almost all cases, proved resilient to the sovereign downgrade.

Banks are typically rated on a standalone basis no higher than the government’s rating due to multiple channels of shared exposure and contagion. Limited exceptions are possible where there is external support or where a bank has substantial assets, revenues and financing resources domiciled outside their home environment, and where direct and indirect credit exposure to the sovereign is limited. However, Italian banks’ substantial exposure to the domestic economy — coupled with high direct exposure to sovereign debt — have resulted in standalone credit assessments that are no higher than the sovereign rating. As a result of these considerations, any further sovereign downgrade would likely result in a commensurate lowering of many banks standalone and debt and deposit ratings (see Moody’s Sector Comment "How Sovereign Credit Quality May Affect Other Ratings" published 13 February, 2012).

For the two affected Government-related issuers (GRIs), Cassa Depositi e Prestiti and Ismea, their debt and issuer ratings were lowered to the same rating level as the sovereign given their high default correlation with the Italian government. For further details of the rating actions, see the specific sections for the two GRIs later in the press release.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upgrades of the banks’ ratings are unlikely in the near term, given the negative outlooks on the ratings as well as the sovereign’s rating. However, a limited amount of upwards rating pressure could develop if any bank substantially improves its credit profile and resilience to the prevailing conditions. This may occur through increased standalone strength, e.g. bolstered capital and liquidity buffers, work-out of asset quality challenges or improved earnings. Improved credit strength could also result from external support; for example, through a change in ownership or the receipt of extra capital or liquidity injections.

Several factors could exert further downwards rating pressure, such as (i) increasing funding stress and reliance on central bank support, which could raise pressure on banks to deleverage, with adverse consequences for asset quality; (ii) a prolonged recession, which could similarly further exacerbate already adverse asset-quality trends and impair capital; or (iii) further weakening of the Italian government’s credit strength.

BANK-SPECIFIC RATING CONSIDERATIONS

UniCredit

The long-term deposit and debt ratings were downgraded to Baa2, in line with the Italian sovereign rating, from A3. The C- BFSR, mapping to a standalone credit assessment of baa2 was affirmed at its current level, which is in line with the sovereign rating. The outlook is negative on all ratings, in line with the sovereign, and with other Italian banks. Moody’s notes that despite UniCredit’s substantial international activities, its important exposure to its domestic market means that its standalone rating is constrained by the level of the sovereign rating, as is the case for other Italian banks rated by Moody’s.

UniCredit Leasing

UniCredit Leasing’s long and short-term issuer ratings were downgraded to Baa3/Prime-3 from Baa2/Prime-2. The outlook remains negative and reflects that of the parent UniCredit (Baa2; C-/baa2, negative).

According to Moody’s, the downgrade follows the downgrade of the parent bank, which reduces the ratings uplift for the issuer rating, despite Moody’s view of a very high probability of parental support from UniCredit.

Intesa Sanpaolo

The long-term deposit and debt ratings were downgraded to Baa2, in line with the Italian sovereign rating, from A3, thus eliminating the notch of systemic support applied previously. The standalone BFSR was affirmed at C-, however this now maps to a standalone credit assessment of baa2 (previously baa1), also in line with the sovereign rating. The outlook is negative on all ratings, in line with the sovereign. Moody’s notes that Intesa’s business is almost entirely domestic in nature, and as such its standalone rating is constrained by the sovereign rating, resulting in the lowering of the standalone credit assessment.

Banca CR Firenze (Carifirenze)

The long-term deposit and debt ratings were downgraded to Baa2 with negative outlook. This is in line with both the parent’s (Intesa Sanpaolo) and the sovereign’s ratings. This rating action eliminated the two notches of parental support from Intesa Sanpaolo, previously incorporated into CR Firenze’s long-term deposit and debt ratings, given the now lower long-term rating of the parent, which forms the basis for assessing parental support. The bank’s C- BFSR, mapping to a standalone credit assessment of baa2, was not affected. The outlook is negative on all ratings, in line with the sovereign, and with other Italian banks.

Banca IMI

The long-term deposit and debt ratings were downgraded to Baa2 from A3. This is in line with both the parent’s (Intesa Sanpaolo) and the Italian sovereign’s ratings. This rating action eliminated the two notches of parental support from Intesa Sanpaolo, previously incorporated into Banca IMI’s long-term deposit and debt ratings, given the now lower long-term rating of the parent, which forms the basis for assessing parental support. The bank’s C- BFSR, mapping to a standalone credit assessment of baa2, was not affected. The outlook is negative on all ratings, in line with the sovereign, and with other Italian banks.

Banca Monte Parma

Banca Monte Parma’s long-term deposit rating was downgraded to Baa2 from Baa1, directly following the downgrade of the ratings of its parent Intesa Sanpaolo. This rating action reduces to one from two notches the level of parental support from Intesa Sanpaolo, given the now lower long-term rating of the parent, which forms the basis for assessing parental support. The bank’s D+ BFSR, mapping to a standalone credit assessment of baa3, was unaffected. The outlook on all ratings remains negative, in line with the sovereign, and with other Italian banks.

Banca Nazionale del Lavoro

Banca Nazionale del Lavoro’s long-term Baa2 deposit rating was affirmed. The other ratings and the negative outlook are unaffected.

The affirmation is based on Moody’s assessment of a very high probability of parental support from BNP Paribas (A2; BFSR C-/BCA baa2, stable) and a high probability of systemic support, which results in two-notches of rating uplift from the ba1 standalone credit assessment. The uplift has not changed and now stems from parental support only — from one notch of parental support and one notch of systemic support previously — following the downgrade of Italy’s rating.

Cassa di Risparmio di Parma e Piacenza (Cariparma)

The long-term deposit and debt ratings were downgraded to Baa2, in line with the Italian sovereign rating, from Baa1, thus eliminating the current one notch of systemic support. The bank’s C- BFSR, mapping to a standalone credit assessment of baa2, was not affected. The outlook is negative on all ratings, in line with the sovereign, and with other Italian banks. Our high expectation of parental support from Credit Agricole(CASA) does not actually result in any uplift for the banks’ ratings, given that Cariparma’s standalone credit assessment of baa2 is in line with CASA’s adjusted standalone credit assessment of baa2.

Banca Popolare Friuladria (Friuladria)

The long-term deposit and debt ratings were downgraded to Baa2, in line with the Italian sovereign rating, from Baa1, so reducing parental support from its parent, Cariparma, to one notch, given the now lower long-term deposit rating of the parent, which forms the basis for assessing parental support. The bank’s D+ BFSR, mapping to a standalone credit assessment of baa3 was not affected. The outlook is negative on all ratings, in line with the sovereign, and with other Italian banks.

Banca Carige

Banca Carige’s long and short-term deposit ratings were downgraded to Baa3/Prime-3 from Baa2/Prime-2. The other ratings and the negative outlook are unaffected.

The key driver for the one-notch downgrade of the deposit ratings is the downgrade of Italy. At this Baa2 rating level of the government, our assessment of a moderate probability of systemic support in the event of a financial crisis results in no uplift from the baa3 standalone credit assessment (from one notch of uplift previously), under our joint default analysis (JDA) methodology.

Credito Emiliano

Credito Emiliano’s long and short-term deposit ratings were downgraded to Baa3/Prime-3 from Baa2/Prime-2. The other ratings and the negative outlook are unaffected.

The one-notch downgrade of the deposit ratings follows the downgrade of Italy. At this rating level of the Italian government, our assessment of a moderate probability of systemic support in the event of a financial crisis provides no uplift from the baa3 standalone credit assessment (from one notch of uplift previously), under our joint default analysis (JDA) methodology.

GE Capital SpA

GE Capital Spa’s long-term deposit rating was downgraded to Baa2 from Baa1. The outlook remains negative.

According to Moody’s, the downgrade reflects the downgrade of Italy. GE Capital’s business is domestic and as such, its rating is constrained by the sovereign rating, despite parental support. In Moody’s view, parental support from General Electric Capital Corporation (rated A1/P-1) continues to be very high, but is likely to be linked to the longer-term prospects for the business in Italy. As a result, we have lowered the parental support uplift provided to the bank’s deposit rating to three from four notches. This uplift is based on our expectation of (i) a very high probability of parental support from General Electric Capital Corporation ; and (ii) low probability of systemic support for GE Capital Spa in the event of a financial crisis.

Cassa Depositi e Prestiti

The government-related issuer (GRI) Cassa Depositi e Prestiti’s long-term issuer and debt ratings have been downgraded to Baa2, with a negative outlook. This is at the same level as the Italian government, given its 70% government ownership and the strong financial and operational linkages with the government, reflected in its public policy function. The outlook is negative in line with the negative outlook on the sovereign.

Istituto Servizi Mercato Agricolo Alimentare (ISMEA)

The GRI ISMEA’s long-term issuer rating has been downgraded to Baa2, with a negative outlook. This is at the same level as the Italian government, given its full government ownership and the strong financial and operational linkages with the government, reflected in its public policy function. The outlook is negative in line with the negative outlook on the sovereign.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.