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Italian corporates damaged most by Moody’s bank downgrades

The Italian corporate sector will be severely hurt from Moody’s downgrade of the country’s main banks, say analysts

Italy’s major non-financial corporates will be damaged the most – in terms of share prices, financing and bond investor in-flows – following Moody’s downgrade of Italy’s two largest banks Intesa Sanpaolo and UniCredit.

“The most damaging implications from the slew of downgrades will be on the corporate sector,” says Marc Ostwald, financial markets strategist at Monument Securities. “If you look at Finmeccanica, it once was a jewel in the crown of the industry but now it will suffer from the downgrade as with anything with the Italian name attached to it.

“It will mean corporate debt investors will be very wary of buying into Italian non-financials, and financing levels will be harder for these firms. Investors will be looking for more diversified non-financial corporate. However, while Italian corporates are global, German industrials, for example, have greater diversification.”

Late Tuesday, ratings agency Moody’s downgraded Italy’s sovereign debt for the first time since 1993 by slashing the country’s government bond ratings by three notches to A2.

Late Wednesday, the agency downgraded the senior debt and deposit ratings of Italian banks and Italian government-related financial institutions by between one and three notches.

The group says that these rating actions followed Tuesday’s downgrade of Italy's government bond rating, and that the rating action also incorporates “a readjustment of our support assumptions for Italian banks to reflect a weakening of the support environment for banks”.

“Moody’s downgrade of Italy is really just a catch up of S&P’s ratings action before,” says Ostwald. “However, the picture still isn’t good and the Italian scenario is a very specific one. Italy has the ability to manipulate its current budget, but consequentially this deteriorates its long-term growth outlook.

“It should put pressure on the Italian government to readdress its policies and talks on privatisation. However, under the Berlusconi government – I have serious doubts whether this is achievable.”

Moody’s downgraded UniCredit’s long-term debt and deposit ratings to A2 from Aa3, while the Prime-1 short-term debt and deposit ratings were unaffected by this rating action. Moody's also downgraded the bank's standalone bank financial strength rating (BFSR) by one notch to C-, mapping to Baa1 on the long-term scale, from C (which maps to A3).

Moody’s gave a negative outlook for the long-term debt and deposit ratings.

Moody’s said that “in the current difficult operating environment, the bank will be challenged to significantly improve the relatively weak profitability of its core Italian operations, and that as a result profitability and asset quality measures will remain at levels more compatible with a C- BFSR for some time”.

Additionally, Moody's said that “the current economic backdrop of low growth rates and the impact of the government's austerity measures constituted some headwind for the group in Italy and other markets, which could intensify the negative pressure on profitability and asset quality”.

Moody's also downgraded Intesa Sanpaolo's long-term debt and deposit ratings to A2 from Aa3. The group’s Prime-1 short-term debt and deposit ratings were unaffected by this rating action but it has still given Intesa’s outlook for the A2 long-term debt and deposit ratings as negative.

Moody's decision to change the outlook to negative from stable on the C+ standalone BFSR reflects both Intesa's direct exposure to the Italian sovereign and its pronounced focus on domestic business, as revenues generated in Italy provide 77% of the group's revenues.

“Moody's therefore believes that the credit profile of Intesa is closely correlated with the Italian government's credit profile,” says the group. “Given this correlation, it will be unlikely for Intesa to be rated higher than the Italian government.”

Analysts say that the move will create lasting damage on the banks’ competitive edge in Europe and will create tougher conditions for financing.

“The refinancing picture for Italian banks will be more difficult and put them at a competitive disadvantage,” says Oswald. “If you look comparatively, the Italian banking sector is the healthiest out of the eurozone, with even the mortgage GDP ratio at the lowest for developed countries in the world."

“However, until the government relooks and readdresses the way it does its budget and other policies, it will lead to more downgrades and a deterioration of its banking sector.”

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