UniCredit SpA and Intesa Sanpaolo SpA 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 today. Milan-based Intesa, the nation’s second-largest lender, also was downgraded to A3 from A2.
The action followed Moody’s decision 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. Italy was lowered to A3, or four steps above junk, from A2 with a negative outlook.
“At this stage, a downgrade on Italian banks was expected, 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.”
Italian banks’ holdings of the nation’s bonds jumped in the first two months of the year as the European Central Bank injected 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 lenders rose 28 percent to 267 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.
After abating in the wake of the ECB’s long-term lending program, Europe’s debt crisis flared, 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 a statement today.
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.
The rating company said last month it expected to conclude all the reviews by the end of June, pushing back the deadline from a previous goal of mid-May. After Italy, results on banks in Spain are expected next, followed by Austria and a dozen other nations, including Germany, France and the U.K., Moody’s said in a statement on April 13.
A Moody’s official who wasn’t authorized to comment publicly said earlier today that the firm’s planned ratings downgrades on European banks were delayed. Moody’s previously had said it planned to begin the downgrades in early May. Moody’s spokeswoman Kirsten Knight said today that the firm’s schedule for “concluding bank rating reviews” hadn’t changed. “Moody’s expects to conclude the reviews by the end of June,” she said in an e-mailed statement.
Banks that are downgraded may need to pay more to borrow and post additional collateral in their derivatives businesses.
“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,” they said.
Moody’s said it 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. Unione di Banche Italiane Scpa was lowered to Baa2 from A3; Banca Monte dei Paschi di Siena was downgraded to Baa3 from Baa1; and Banco Popolare SC was cut to Baa3 from Baa2.
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.
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