UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) were among 26 Italian banks that had their credit ratings cut one to four levels by Moody’s Investors Service, which cited weakened earnings and the country’s economic outlook.
UniCredit, Italy’s biggest bank, had its long-term debt rating lowered one step to A3, Moody’s said in a spreadsheet on its website yesterday. Milan-based Intesa, the nation’s second-largest lender, also was downgraded to A3 from A2.
“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,” Moody’s said in a statement. “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.”
Banks that are downgraded may need to pay more to borrow and post additional collateral in their derivatives businesses. ABI, the Italian banking association, today said the downgrades were “irresponsible” and an “aggression” on Italy. Moody’s decided on Feb. 13 to cut the credit rating of Italy and five other countries, including Spain, on doubts over the euro region’s ability to deal with the debt crisis.
Shares of the lenders were mixed today on speculation that their slump in May already reflects the weaker outlook. Carlo Mereels, a credit analyst at RBC Capital Markets, said in a note today that the downgrades were “less than what Moody’s had previously flagged.”
Italy was lowered by Moody’s to A3, or four steps above junk, from A2 with a negative outlook in February.
“The cut was largely expected and the fact that all the banks we cover remain above the investment grade threshold is, at the end, a good news in relative terms,” analysts at Fidentiis Equities wrote in a note to clients today.
UniCredit rose 0.4 percent to 2.69 euros as of 12:20 p.m. in Milan trading, while Intesa gained 1.8 percent to 1.05 euros. Unione di Banche Italiane Scpa, which released first-quarter earnings before the market opened, rose 0.6 percent to 2.44 euros while Banca Monte dei Paschi di Siena SpA fell 0.9 percent to 24.1 cents.
Moody’s reduced debt and deposit ratings by one level for 10 banks, two levels for eight banks, three levels for six banks, and four levels for two banks. UBI was lowered to Baa2 from A3; Monte Paschi was downgraded to Baa3 from Baa1; and Banco Popolare SC (BP) was cut to Baa3 from Baa2.
Government Bond Holdings
Italian banks’ holdings of the nation’s bonds jumped in the first three months of the year as the European Central Bank injected more than 1 trillion euros ($1.28 trillion) into the region’s financial system through two offerings of three-year loans. Italy’s sovereign debt held by its banks rose 39 percent to 291 billion euros in those two months, according to Bank of Italy figures, as the country’s lenders took up almost a fourth of the funds offered by the ECB.
“At this stage, a downgrade on Italian banks was likely, given their correlation with the economic cycle and the country’s debt,” said Fabrizio Spagna, managing director at Axia Financial Research. “They have a huge amount of government bonds in their portfolios, which affect their financial positions.”
After abating in the wake of the ECB’s long-term lending program, Europe’s debt crisis has flared up again, widening the gap in yield between Italian and German government bonds and increasing the cost of insuring against a sovereign default.
“The Italian government’s austerity measures and structural reforms are weighing on the country’s near-term economic outlook,” Moody’s wrote in the statement.
Moody’s first announced in February that it was putting 114 European banks and an additional eight non-European firms with large capital-markets businesses under review to assess the impact of Europe’s debt crisis.
“Funding costs are more sensitive at lower ratings, especially for senior unsecured medium- and long-term debt,” Citigroup Inc. analysts Kinner Lakhani and Sentoor Kanagasabapathy wrote in a report on April 30. “While potential Moody’s rating downgrades may largely be priced into credit markets, the corresponding impact of these on banks’ funding costs will naturally take place over the refinancing calendar.”
ABI, the banking lobby, said it will meet tomorrow to review the rating downgrades and consider possible action.
The yield on UniCredit’s 1.5 billion euros of 4.875 percent bonds due 2017 has risen 89 basis points to 5.83 percent since the notes began trading in February, BNP Paribas SA prices show. Intesa Sanpaolo’s 1 billion euros of 5 percent, five-year bonds, sold the same month, yielded 5.279 percent in Hong Kong trading, an 11 basis-point increase since May 11.
Monte Paschi’s 4.5 percent bonds were paying investors 5.72 percent, according to BNP Paribas. The notes yielded 4.49 percent at the beginning of March.
The Bank of Italy said in a report on April 26 that the potential downgrades of domestic banks and their bonds carried a risk to the Italian banking system’s funding capacity.
UniCredit and Intesa said in separate statements that their ratings were aligned to that of Italy. UBI said in a statement that Moody’s had confirmed “the bank’s second-tier ranking, as the tier 1 ranking is accessible only to Italian banks with a strong presence abroad.”
Moody’s said on April 13 that it expected to finish all the reviews by the end of June, pushing back the deadline from a previous goal of mid-May. After Italy, it had said reviews of banks in Spain were expected next, followed by Austria and a dozen other nations, including Germany, France and the U.K.
A Moody’s official who wasn’t authorized to comment publicly said yesterday that planned downgrades on banks were delayed. Moody’s previously had said it planned to begin the decisions in early May. Kirsten Knight, a Moody’s spokeswoman, subsequently said the schedule for “concluding bank rating reviews” hadn’t changed and was expected by the end of June.
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