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Rating Action:

Moody's affirms Banca Carige's B3 deposit rating and Caa2 issuer rating; deposit outlook negative

13 Dec 2017

Issuer rating outlook stable

London, 13 December 2017 -- Moody's Investors Service today affirmed the B3 long-term deposit ratings and Caa2 long-term issuer rating of Banca Carige S.p.A. (Carige). At the same time, Moody's upgraded Carige's standalone baseline credit assessment (BCA) and adjusted BCA to caa1 from ca and its long-term Counterparty Risk Assessment (CR Assessment) to B1(cr) from B3(cr). The outlook on the long-term deposit ratings was changed to negative from developing; the outlook on the long-term issuer rating was changed to stable from developing.

The bank's short-term deposit rating of Not Prime and its short-term CR Assessment of Not Prime(cr) were unaffected by today's rating action.

The rating action reflects (i) Carige's recapitalisation and planned problem loan reduction; (ii) higher loss-given-failure for the bank's junior deposits and senior unsecured bonds; and (iii) Moody's revised view of a low likelihood of government support.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

In Moody's view the steps being taken by Carige will improve the bank's standalone creditworthiness, leading to a three-notch upgrade in the BCA to caa1, following the impairment of its subordinated debt, as reflected in the previous BCA of ca. Nevertheless, Moody's notes that, even after the restructuring, Carige's problem loans remain very high, driving the caa1 BCA.

On 6 December the bank effectively completed a €500 million share issue which, together with a completed exchange of subordinated bonds into senior bonds at a discount generating a €220 million capital gain and ongoing asset disposals (to be completed in H1 2018) generating a further €200 million so far, will raise about €1 billion of capital. The proceeds will largely be used to write down and then dispose of €1.9 billion of problem loans, €1.2 billion of which were already sold and the remainder is to be disposed of by end-2018.

Carige expects to report a strengthened Common Equity Tier 1 ratio (CET1) of 12.5% (according to the bank's calculation) by end-2018, compared to its working minimum of 11.9% (comprising both the ECB's requirement and guidance), and a reduction in its gross problem loan ratio to 19% by end-2018 (from 32% at end-September 2017).

Moody's does not however factor into the BCA the full benefit of the profitability improvements envisaged under the bank's restructuring plan, i.e. a 6.5% return on tangible equity in 2020 (compared to -9.9% in the first nine months of 2017), which assumes a cost of risk of 55 bp (compared to 229 bp in the first nine months of 2017). The rating agency believes that, despite lower loan loss provisions and significant operating cost reductions, a return to adequate profitability will be more gradual. In particular, achieving a cost-to-income ratio of 57% in 2020, from a very high 95% in the first nine months of 2017 (excluding the losses on the disposal of problem loans) will be very challenging. Although this only requires a compound annual growth rate in revenue of 4%, this target will be difficult to meet while the bank is changing its business model by reducing its headcount and branches by one fifth.

RATIONALE FOR THE LONG-TERM RATINGS

The affirmation of the B3 deposit rating and Caa2 issuer rating reflects (i) the upgrade of the BCA to caa1; (ii) the exchange of subordinated debt into senior debt at a discount and the reducing stock of bail-in-able debt, which result in higher loss-given-failure for the bank's junior deposits and senior unsecured bonds; and (iii) Moody's revised view of a low likelihood of government support (from moderate previously), which no longer provides any uplift to the ratings (previously one notch).

Moody's said that, using most recent data and the expected repayment of bonds maturing in Q4 2017 and 2018, its Loss Given Failure (LGF) analysis indicates that Carige's rated deposits are likely to face low loss-given-failure, from extremely low previously; this provides one notch of uplift from the caa1 BCA, compared to three notches previously.

Similarly, Moody's LGF analysis indicates that Carige's senior unsecured instruments are likely to face high loss-given-failure, from low previously; this reduces the issuer debt rating to one notch below the caa1 BCA, from one notch of uplift previously.

Moody's previously considered there to be a moderate probability of government support for Carige's deposits and senior debt, given similarities with the Veneto banks which recently received a partial bail-out. However, now that Carige will successfully raise its own capital, such a rescue is unlikely in the short term and Moody's believes that in the event of Carige needing further capital at a later stage, tighter conditions on state aid will likely apply. Furthermore, the bank's stock of senior debt is now low and little will remain by 2019; given these considerations, Moody's now considers the probability of government support to be low.

RATIONALE FOR THE OUTLOOKS

The outlook on the long-term deposit rating is negative, because Moody's expects bail-in-able debt to decrease as retail senior unsecured bonds mature in 2018, which could increase the loss-given-failure of junior deposits in the absence of new issuance.

The outlook on the long-term issuer rating is stable, reflecting the rating agency's expectations that a return to adequate profitability will be gradual and the bank's financials will remain compatible with a caa1 BCA over the next 12-18 months. The loss-given-failure of senior debt is already high so no further increase is possible.

RATIONALE FOR UPGRADING THE CR ASSESSMENT

As part of today's rating action, Moody's has also upgraded to B1(cr) from B3(cr) the long-term CR Assessment of Carige, three notches above its adjusted BCA of caa1.

The upgrade of the CR Assessment follows the upgrade of the BCA of Carige to caa1 from ca. The CR Assessment is driven by the standalone assessment of Carige; the amount of bail-in-able debt and junior deposits remains considerable, shielding operating liabilities from losses, and accounting for three notches of uplift relative to the BCA. In common with the senior debt and deposit ratings, the CRA does not include any uplift from government support.

FACTORS THAT COULD LEAD TO AN UPGRADE

Moody's could upgrade Carige's BCA if the bank makes significant progress towards execution of its restructuring plan, with, in particular, a meaningful profitability improvement and significant de-risking, without compromising its target capital levels. In addition to a higher BCA, Moody's could also upgrade Carige's deposit or issuer ratings if the issuance of senior or subordinated debt reduces the loss--given-failure for junior deposits or senior debt.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Conversely, Moody's could downgrade the BCA if further losses reduce Carige's capital headroom over its prudential requirement. In addition to a lower BCA, Moody's could also downgrade Carige's deposit rating if shrinking senior debt increases the loss-given-failure for junior deposits.

LIST OF AFFECTED RATINGS

Issuer: Banca Carige S.p.A.

..Affirmations:

....Long-term Bank Deposits, affirmed B3, outlook changed to Negative from Developing

....Long-term Issuer Rating, affirmed Caa2, outlook changed to Stable from Developing

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to caa1 from ca

....Baseline Credit Assessment, upgraded to caa1 from ca

....Long-term Counterparty Risk Assessment, upgraded to B1(cr) from B3(cr)

..Outlook Action:

....Outlook changed to Negative(m) from Developing

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carlo Gori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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