17.07.2012

By Simon Miller

Moody's has downgraded 13 Italian banks after the weakening of Italy's credit profile which led to it being downgraded to near-junk status on 13 July.

The ratings agency said it had downgraded by one notch the long-term ratings seven banks and by two notches for the remaining six with three banks also seeing their short-term ratings downgraded by one notch.

In a ratings note, the agency said: "Along with the increase in the risk of sovereign bond defaults, the downgrade of Italy's long-term ratings to Baa2 also indicates a similarly increased risk that the government might be unable to provide financial support to its banks in financial distress. As a consequence, Italian banks with standalone ratings at or close to the Baa2, and higher debt and deposit ratings as a result of an expectation of systemic support , have seen the support uplift in their debt ratings reduced by one or two notches."

The reduced expectation of systemic support that prompted today's rating actions followed downgrades of several Italian banks taken on 14 May 2012.

Moody's said the revised standalone credit assessments announced on 14 May were set to be resilient to a degree of further stress, and reflected the banks' substantial exposures to the Italian economy and the Republic's credit worthiness.

"As a result, those earlier actions largely limited the extent of the rating actions taken today to changes in the credit enhancement associated with systemic support. Accordingly, the standalone ratings, in almost all cases, proved resilient to the sovereign downgrade," it added.

Although banks were typically rated on a standalone basis no higher than the government's rating due to multiple channels of shared exposure and contagion, however, Italian banks' substantial exposure to the domestic economy - coupled with high direct exposure to sovereign debt - have resulted in standalone credit assessments that are no higher than the sovereign rating.

"As a result of these considerations, any further sovereign downgrade would likely result in a commensurate lowering of many banks standalone and debt and deposit ratings," said Moody's.

For the two affected Government-related issuers (GRIs), Cassa Depositi e Prestiti and Ismea, their debt and issuer ratings were lowered to the same rating level as the sovereign given their high default correlation with the Italian government.

For the list of affected banks, click here.