Moody's Cuts Outlook On Italian Banks To Negative From Stable

One week after Fitch downgraded Italian banks to a negative outlook due to soaring bad debt, and risks resulting from the failed referendum, moments ago Moody's did the same, when it announced it was changing its outlook on the Italian banking sector to negative from stable due to increasing capital needs and weakening confidence.

While hardly a surprise, Moody's said that "Italian banks currently have one of the highest problem loan ratios in Europe at 16.4% of total loans, more than three times the 5.4% European average, as data from the European Banking Authority as of June 2016 showed."

For those who missed it, a good breakdown of imapired loans to capital was shown by Fitch last week.

 

 

Moody's says its negative outlook reflects a view that the recognition of losses will depress the banking sector’s profitability and erode its capital over the next 12 to 18 months - as UniCredit confirmed earlier today with Italy's largest ever proposed equity issuance - as well as the adverse effect upon confidence following the country’s rejection of constitutional reforms.

The rating agency also said that the success of Italian banks' recapitalisation will also hinge on the viability of their business models and on market confidence, which could be undermined by increased political uncertainty following the "No" vote in the recent referendum. In addition, Moody's notes that a failure to restructure a weak bank such as Monte dei Paschi di Siena could further undermine confidence.

Full press release:

Moody's changes outlook on Italian banking sector to negative from stable due to increasing capital needs and weakening confidence

Moody's Investors Service has changed its outlook on Italy's banking system to negative from stable, reflecting the rating agency's view that the recognition of losses will depress the banking sector's profitability and erode its capital over the next 12 to 18 months, as well as the adverse effect upon confidence following the country's rejection of constitutional reforms.

Moody's report, entitled "Banking System Outlook -- Italy: Negative outlook driven by capital needs and weakening confidence," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

Italian banks currently have one of the highest problem loan ratios in Europe at 16.4% of total loans, more than three times the 5.4% European average, as data from the European Banking Authority as of June 2016 showed.

Although problem loan formation in Italy has slowed considerably, a reduction in the outstanding amount will be gradual, according to Moody's. This is because banks have limited resources in the form of excess capital over minimum requirements and private investors little appetite to finance the restructuring of Italian banks.

As a result, the rating agency expects higher loan-loss provisions, leading to depressed profitability or losses for the banking system in 2016 and 2017. Banks will need to recognize additional impairments and losses when selling problem loans, given the aforementioned limited market demand for bad loans at current book values.

The success of Italian banks' recapitalisation will also hinge on the viability of their business models and on market confidence, which could be undermined by increased political uncertainty following the "No" vote in the recent referendum. In addition, Moody's notes that a failure to restructure a weak bank such as Monte dei Paschi di Siena could further undermine confidence.

Operating conditions more generally will not be very favorable for Italy's banks over the outlook period. The country's economic growth will remain well below that of European Union peers, with Moody's estimating real GDP growth of 0.8% in 2016 and 2017 and 1% in 2018, after 0.7% in 2015, as noted earlier this month.

Demand for credit and banking services will remain subdued, offering only modest revenue growth opportunities for banks, while spreads are under pressure from low interest rates and high competition in a fragmented market.

More positively, though, the banking system's liquidity should remain strong, according to Moody's, supported by the European Central Bank's second targeted long-term refinancing operations (TLTRO2) and subdued loan demand.

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