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Moody's downgrades Banca Carige to B2 from Ba2.

Summary: all ratings remain on review for downgrade

Moody's Investors Service has today downgraded Banca Carige's long-term issuer and deposit rating to B2 from Ba2, and lowered the bank's standalone baseline credit assessment (BCA) to b3 from ba3. All ratings remain on review for further downgrade.

RATIONALE FOR THE DOWNGRADE

Moody's says that the lowering of the standalone BCA by three notches was

triggered by a combination of four key risks factors: (1) Banca Carige's

severe asset quality erosion reported for the quarter ended June 2013;

(2) Moody's significantly weaker profitability outlook for the bank for

2013 and 2014 (both of these factors have deteriorated beyond Moody's

earlier expectations at the time of the last rating action in July); (3)

the possible impact of forthcoming changes in the bank's board of

directors, including the Chairman, which will likely coincide with

changes to the bank's governance practices that could, in turn, have an

impact on the bank's capital; and (4) Moody's view of the heightened

execution risk for the bank's capital raising.

Problem loans as percentage of gross loans increased to 11.2% in June

2013, up from 8.5% at December 2012. The rating agency notes that these

figures significantly exceed the average of 6.4% reported between 2008

and 2011 (see notes 1 and 2 at the end of this press release). These

weaker figures place Banca Carige more in line with the Italian banking

system average. Over the past three to four years, the bank's reported

figures were better than the Italian average, a key driver of the bank's

higher ratings in the past.

Following two inspections by the Bank of Italy, Banca Carige reported

loan loss charges of EUR241 million in 1H 2013 (1H 2012: EUR74 million),

which led to a EUR31 million net loss. This loss follows another asset

quality-driven loss recorded in 2012 of EUR63 million (EUR324 million

loss if one-off tax gains are excluded).

Furthermore, Moody's notes that Banca Carige's loan loss coverage is

still significantly below the system average; in June 2013, the bank's

loan loss reserves accounted for 46% of problem loans, which compares

with a 55% system average as at December 2012 (see note 3 at the end of

this press release). In the agency's opinion, these lower loan loss

coverage levels may indicate the need for additional provisioning in the

future.

Moody's believes that Banca Carige's internal capital generation capacity

will remain significantly weakened over the short- to medium term given

(1) the additional loan loss charges reported in June; and (2) the

increased likelihood that provisions will remain high in 2H 2013 and also

in 2014.

Additionally, Moody's notes that the bank will be appointing a new board

of directors at the end of September, including a new Chairman, which

will coincide with a change in the bank's governance practices. The Bank

of Italy inspections revealed some deficiencies in Banca Carige's

classification of problem loans, which in the past led to a

lower-than-average cost of credit. Going forward, Moody's believes that

the new management's review of the bank's asset valuation and reserving

policies, and introduction of improved standards upon recommendation from

the regulator, may have an impact on the bank's asset quality, coverage,

profitability, and ultimately capital. Therefore Banca Carige's planned

EUR800 million capital strengthening may not be sufficient to reach a

level of capital commensurable with a standalone BCA of b3. At the end of

October, the bank is due to present a new business plan, in which any

such decision might be reflected.

Moody's notes elevated execution risk associated with the bank's planned

rights issue. This capital increase needs to be implemented by end-Q1

2014. Banca Carige aims to implement the first phase of its

capitalisation programme through the sale of non-core assets, with funds

for the second phase being raised via a capital increase. However, the

sale of non-core assets has not yet fully materialised, thus increasing

the risk that most of the EUR800 million capital increase will be raised

by tapping the equity markets. Moody's also notes that the criteria and

parameters of the impending Asset Quality Review to be undertaken by the

ECB have not yet been specified. This uncertainty constitutes a further

obstacle to attracting potential investors to the share offering against

the background of any clarity that the ECB review may yield regarding

Banca Carige's solvency levels. The bank's weaker-than-expected

performance in 1H 2013, together with the above-mentioned governance

changes, should also increase the challenge to raise the necessary

capital.

Moody's says its systemic (government) support assumptions for Banca

Carige remain moderate, reflecting the bank's size and importance in the

Italian banking system. The probability of support results in an

unchanged one-notch uplift from the bank's standalone BCA of b3 to the

long-term issuer and deposit rating of B2.

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Publication:EMBIN (Emerging Markets Business Information News)
Date:Sep 22, 2013
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