Fitch downgrades Italian banks

MANILA, Philippines - Fitch Ratings said its outlook for Italy’s largest banks is ‘negative.’ The agency believes that the prospects for Italy’s five largest banks have significantly deteriorated.

At the same time, uncertainty over the resolution of the euro zone crisis gives rise to significant downside risks for Italian banks, whose funding costs are linked to spreads on government debts.??

In a press statement, Fitch noted that key to a change of the outlook to stable would be a significant improvement in operating profitability. This would require a normalization of funding costs at sustainable levels and improvements in the performance of the domestic economy. As loan impairment charges are unlikely to decline sharply in the short term, continued cost reduction efforts should help the banks to improve operating profitability.

Given pressure on earnings, higher funding costs and the sluggish performance of the domestic economy, Fitch expects profitability to remain weak well into 2012.

Fitch considers the weak operating performance of the five large banks, which had operating returns on equity (ROAE) in the first semester of 2011 of between 0.3 percent for Banco Popolare (‘BBB+’/Negative) and above six percent for UniCredit S.p.A. (‘A’/RWN) and Intesa Sanpaolo (IntesaSP, ‘A’/Negative) to be a key issue.

Operating returns on average assets (ROAA) for the same period ranged between 0.02 percent (Banco Popolare) and 0.58 percent (IntesaSP). ??

Fitch expects that the five large Italian banks, which together issued over EUR90 billion bonds in the first half of the year (including domestic and international issues), will manage to raise sufficient funding in difficult market conditions by relying on issuing bonds through their branch networks.

Italian banks’ sovereign exposure is limited to Italy, but is significant. At end-June 2011, the aggregate exposure to the Italian government amounted to about 170 billion euro, equal to about 180 percent of the banks’ aggregate Fitch core capital. Sovereign exposure to other European peripheral countries remained limited at an aggregate 5.2 billion euro at the same date.??

The agency downgraded three of the five major Italian banks’ Long-term IDRs on Oct. 11, 2011 following the downgrade of the Italian sovereign rating to ‘A+’/negative. At the same time, Fitch placed one bank on Rating Watch Negative (RWN). Following these rating actions, the Long-term IDRs of all five major Italian banks have a negative outlook or are on RWN.??

The five major banks covered in the report are UniCredit, Intesa Sanpaolo, Banca Monte dei Paschi di Siena (‘BBB+’/negative), Banco Popolare and Unione di Banche Italiane-UBI Banca (‘A-’/negative).