Moody's downgrades 26 Italian banks

 

The rating agency noted that the action, announced late May 14, reflects the banks' standalone credit assessments. Third-party support, including from the government, is not taken into account, it said in a statement. 

The ratings were lowered by one to four notches. The debt and deposit ratings declined by one notch for 10 banks, two notches for eight banks, three notches for six banks, and four notches for two banks. The short-term ratings for 21 banks have also been downgraded by one to two notches, triggered by the long-term rating downgrades.

 

The ratings for Italian banks are now amongst the lowest within advanced European countries, reflecting these banks' susceptibility to the adverse operating environments in Italy and Europe. Today's rating actions reflect, to differing degrees for each affected bank, the following key drivers:

 

1.) Increasingly adverse operating conditions, with Italy's economy back in recession and government austerity reducing near-term economic demand;

 

2.) Mounting asset-quality challenges and weakened net profits, as problem loans and loan-loss provisions are rising; and

 

3.) Restricted access to market funding which, if persistent, will exert added pressure on banks to reduce assets, posing risks to their franchises and earnings.

 

 

The rating agency noted that recent events highlight the risks for creditors from potential weaknesses in governance, controls and risk management, especially at some smaller, privately-held banks. 

 

It also noted that the downgrade magnitude could have been more severe without several mitigating issues like the European Central Bank's substantial liquidity support which significantly reduce near-term default risk. Furthermore, many banks have strengthened their capital levels and continue to generate sizeable pre-provision earnings under difficult conditions.

 

Nevertheless, given already elevated problem loan levels and weakened profitability, Italian banks are particularly vulnerable to adverse operating conditions, which are likely to cause further asset quality deterioration, earnings pressure, and restricted market funding access. These risks are exacerbated by investor concerns over the sustainability of the Italian government's debt burden, which has contributed to the difficult wholesale funding conditions faced by Italian banks.

 

 

The rating outlooks for all 26 banks are negative. There are several factors that could cause further downward adjustments, such as (i) increasing funding stress; (ii) a prolonged recession; (iii) crystallisation of corporate governance, control and risk management weaknesses; or (iv) further weakening of the Italian government's creditworthiness. Moody's noted that the potential for further rating transition is heightened by the possibility of rapid increases in problem loans, as has been evident following supervisory inspections of certain Italian banks.

 

 

Upgrades of the banks' ratings are unlikely in the near term. However, a limited amount of upward rating pressure could develop if any bank substantially improves its credit profile and resilience to the prevailing conditions

 

Moody's recognises that many Italian banks rely more on retail funding (including bonds issued to retail investors) than some European peers. However, balance sheet growth in recent years has increasingly been funded by market funds, resulting in loan-to-deposit ratios significantly above 100 per cent even for traditionally retail-funded institutions. Structural reliance on market funds now poses a key challenge for many banks.