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Rating Action:

Moody's affirms UniCredit's Baa2/P-2 rating; lowers BCA to baa3

15 Jul 2013

London, 15 July 2013 -- Moody's Investors Service has today affirmed UniCredit SpA's Baa2 long-term debt and deposit ratings and its Prime-2 short term ratings. At the same time, Moody's lowered UniCredit's baseline credit assessment to baa3 from baa2, which resulted in a downgrade of the banks subordinated debt rating to Ba1 from Baa3.

The affirmation reflects the incorporation of one notch of systemic support, whilst the lowering of the BCA reflects UniCredit's weakening profitability and asset quality, which are affected by the ongoing recession in Italy and are expected to remain under pressure throughout 2013 and into 2014.

The BCA also takes into account the bank's satisfactory capital adequacy and diversification of its business which, in Moody's opinion, enhance the bank's ability to manage the effects of the adverse economic environment.

The ratings of the bank's subordinated debt instruments and programs are affected by this action. The outlook on all the bank's ratings is negative. Separate press releases will be issued for the group's other subsidiaries.

RATINGS RATIONALE

--- DEPOSIT RATING

Moody's affirmation of UniCredit's Baa2 deposit rating incorporates one notch of uplift for the debt ratings from the bank's standalone BCA, reflecting the likelihood of systemic support from the Italian government (rated one notch higher than the bank's standalone rating, at Baa2 negative) being forthcoming in the event of need.

The outlook for UniCredit's deposit ratings is negative. This reflects ongoing pressure on the bank's BCA, in line with other Italian banks, and the negative outlook for the Italian sovereign rating.

--- LOWERING OF THE BCA

FIRST DRIVER --- WEAKENING PROFITABILITY

UniCredit's weakening profitability, which also is below peer levels, is due to very high loan-loss provisions in Italy and low efficiency levels. Moody's expects the bank's profitability to remain under pressure throughout 2013 and 2014 given (1) the low interest-rate environment and high cost of funding; (2) a likely need for ongoing high loan-loss provisions; and (3) the challenges of improving the profitability of the bank's Italian activities in view of the weakness of the Italian economy.

In Moody's opinion, profitability improvements beyond 2014 will depend on the strength of the recovery of the Italian economy. In this respect, Moody's forecasts for GDP growth have been revised significantly downwards since the last rating action on UniCredit's standalone credit assessment in May 2012 to around -2% in 2013 (from around zero growth) and around zero growth in 2014, with downside risks to these forecasts.

UniCredit reported a net profit of EUR865 million in 2012. However, the underlying result would have been a loss of EUR 1.3 billion as adjusted by Moody's to exclude significant extraordinary profits such as an EUR2 billion tax benefit on goodwill and an EUR0.8 billion gain on buy-backs. The cost-to-income ratio deteriorated to 65% (from 58%) and pre-provision income declined by 18% to EUR8.8 billion, or 2% of average risk-weighted assets. These levels are below those of banks Moody's considers to be peers of UniCredit.

Loan-loss provisions increased by 59% to EUR9 billion in 2012 (of which EUR6.6 billion was related to Italian exposures), a level beyond Moody's expectations and closer to the agency's adverse scenario. This resulted in a EUR3.2 billion pre-tax loss in Italy, which was partially mitigated by the group's earnings diversification in more profitable markets such as Germany and Central and Eastern Europe (CEE). The EUR449 million net income reported in Q1 2013 is broadly in line with the EUR436 million recurring result in March 2012 and therefore, in Moody's view, does not suggest an improving performance.

SECOND DRIVER --- WEAK AND DETERIORATING ASSET QUALITY

The group's Italian activities are the main driver of UniCredit's weak and deteriorating asset quality. With gross problem loans -- as adjusted by Moody's -- of 10.9% of loans in 2012 (10% in 2011) and 61% of equity and loan loss reserves, UniCredit's asset quality is weak, despite the diversification in markets such as Germany and Austria. Of reported problem loans in March 2013, 71% relate to Italy, where the group's loan performance is considerably worse than the average across the Italian banking system. Gross problem loans in Italy -- as reported by the bank -- were 20% of loans in March 2013 (compared to 16% in December 2011), in line with weaker banks in Italy (the system average according to the Bank of Italy stood at 13.5% at FYE 2012). Moody's believes that problem loans -- particularly non-performing loans -- will continue to deteriorate until at least 2014, considering (1) the recessionary operating environment in the key Italian market, as detailed above; (2) the still high inflows to problem loans; and (3) the long work-out times in Italy.

However, Moody's acknowledges the bank's satisfactory capital adequacy and funding and earnings diversification which, in Moody's opinion, enhance the bank's ability to manage the effects of the adverse economic environment, until the Italian economy recovers.

UniCredit has strengthened capital adequacy in recent years, through both deleveraging and capital increases, with a leverage ratio (total IFRS assets/tangible common equity) of 17x -- which is lower than the average for large European banks -- and an 11% Core Tier 1 ratio, which provides a degree of resilience in Moody's highly adverse scenario.

The bank's considerable funding diversification by type and geography (in Germany and other markets), underpins liquidity. In particular, (1) the group has EUR107 billion of unencumbered assets, significantly in excess of one year wholesale maturities; and (2) since 2012, the group has retained market access -- albeit at relatively high cost -- when at times this has not been possible for other Italian banks.

Unicredit's financial profile also benefits from earnings diversification, especially in view of the pressures in its domestic market, thus allowing it to offset performance and asset quality challenges in Italy. The group generated two thirds of revenues outside of the Italian division in Q1 2013, the main contributor being CEE with 27%.

WHAT COULD MOVE THE RATINGS UP/DOWN

There is no upwards pressure on the ratings given the negative outlook and the recent lowering of the BCA. Over time, upwards pressure could develop on the BCA following (1) a significant improvement in profitability, particularly in the group's core Italian business; and (2) a reduction in the level of problem loans. The deposit rating could be upgraded if the BCA is raised and the sovereign creditworthiness of Italy improves.

Conversely, further downward pressure on the ratings could stem from (1) evidence that the operating environment - particularly in the Italian market - is leading to further significant deterioration in profitability or asset quality; or (2) market access becoming restricted for a long period, increasing the bank's dependence on ECB funding. A lowering of the BCA could prompt a downgrade of the long-term deposit and debt ratings. This would depend on how the prospects for systemic support evolve in Italy and the EU, in light of developments with regard to resolution mechanisms and burden sharing for European banks . A downgrade of the Italian government bond rating would also lead to a lowering of the bank's BCA and downgrade of the debt and deposit ratings.

List of affected ratings:

UniCredit and its backed vehicles

The following ratings were affirmed

- Senior unsecured debt and bank deposits: Baa2 with negative outlook; EMTN: (P)Baa2

-Short-term bank deposits: Prime-2

The following ratings were downgraded

- Subordinate debt: Ba1 with negative outlook; EMTN: (P)Ba1

- Tier III debt EMTN: (P)Ba1

- Junior subordinate: Ba2(hyb) with negative outlook; EMTN: (P)Ba2

- Pref. Stock: Ba3(hyb) with negative outlook

- BFSR/BCA: D+ with negative outlook/baa3

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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
SUBSCRIBERS: 44 20 7772 5454

Johannes Felix Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms UniCredit's Baa2/P-2 rating; lowers BCA to baa3
No Related Data.
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