UniCredit SpA and Intesa Sanpaolo SpA were among 13 Italian banks that had credit ratings cut by Moody’s Investors Service, which cited the nation’s weakening economy and government finances.
UniCredit, Italy’s biggest bank, and Intesa, its second-largest, had their debt and deposit ratings lowered two steps to Baa2 and may face further downgrades, Moody’s said yesterday in a statement. It was the second time in two months that Moody’s downgraded the firms, which have “high direct exposure to sovereign debt.”
“Despite UniCredit’s substantial international activities, its important exposure to its domestic market means that its stand-alone rating is constrained by the level of the sovereign rating,” Moody’s said. “Intesa’s business is almost entirely domestic in nature.”
The Italian state has an “increased risk” of being unable to support banks in distress, the company said. Moody’s cut Italy last week to Baa2 from A3, and said further downgrades are possible as weak growth and elevated unemployment put the government’s plan to cut the budget deficit and rein in bond yields at risk. The new grade is two levels above junk.
The outlook on both banks is negative, in line with the government’s, Moody’s said. Paola Di Raimondo, a UniCredit spokeswoman, had no comment. An Intesa official said the bank doesn’t comment on ratings.
Yields on 10-year Italian bonds rose for a fourth consecutive day, increasing one basis point to 6.17 percent. They touched a six-month high of 6.34 percent a month ago.
“The downgrades reflect the stress the sovereign is under,” said Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc in London. “Italian banks hold significant amounts of sovereign debt and have cross-holdings of bank debt and equity. Direct recapitalization of banks would be of help.”
Gallo said he expects more downgrades for Italy and Spain this year as policy makers struggle to contain the euro region’s sovereign-debt crisis.
Shares of UniCredit gained 0.8 percent to 2.666 euros at 10:30 a.m. in Milan, valuing the bank at about 15.4 billion euros ($19 billion). They have tumbled 37 percent this year.
Intesa shares slipped 0.2 percent to 1.006 euros, valuing the lender at about 16.4 billion euros. The stock is down 22 percent this year.
Costs to insure UniCredit bonds against default fell 2 basis points to 564 basis points, while Intesa credit-default swaps rose 4 basis points to 508 basis points.
Ten banks had long-term debt and deposit grades cut yesterday and three had issuer ratings reduced, Moody’s said. Ratings fell one step for seven of the affected companies, and two levels for the remaining six.
Moody’s had cut 26 Italian banks, including UniCredit and Intesa, by one to four levels on May 14. In that case, it cited weakened earnings and the country’s economic outlook.
“Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets,” Moody’s said on July 13. “Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”
The banks’ ratings could be revised upward if the lenders take steps to bolster capital and liquidity, see an improvement in credit or increase earnings, Moody’s said in yesterday’s statement.
Investors are paying less attention to the views of rating companies and relying more on their own analysis. After Moody’s downgraded the biggest Nordic banks in May, bond and share prices rose.