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Rating Action:

Moody's confirms Banca Carige's Ba2 long-term issuer and deposit ratings; outlook is now negative

23 Jul 2013

Standalone BCA lowered by one notch to ba3

London, 23 July 2013 -- Moody's Investors Service has today confirmed Banca Carige (Carige)'s long-term issuer and deposit ratings of Ba2. At the same time, the standalone baseline credit assessment (BCA) was lowered to ba3, which is equivalent to a standalone bank financial strength rating (BFSR) of D-, from ba2/D.

According to Moody's the lowering of the standalone rating reflects the increasingly difficult operating environment in Italy, and the expectation that this will result in pressure on profitability and asset quality persisting in 2013 and into 2014. At the same time the rating agency noted the progress being made by the bank in selling non-core assets, which should in the coming months result in significant improvement in capital adequacy. The rating agency however also noted that failure by the bank to successfully complete this planned capital strengthening could lead to a further downgrade in the bank's ratings.

The long-term deposit and issuer ratings of Ba2 were confirmed, reflecting Moody's continuing assumption of moderate systemic (government) support in case of need; at the lower standalone rating level, this assessment of support likelihood now results in a one-notch uplift from the standalone BCA of ba3.

This rating action concludes the review initiated on 27 April 2013.

RATINGS RATIONALE

The main driver of today's action is the persistency of a difficult operating environment in Italy. Moody's forecasts a GDP contraction of around 2% in 2013, and zero growth in 2014; some sign of recovery is expected only towards the end of 2014. These macro-economic factors are expected to result in a further pressure on asset quality and profitability for Carige, and for the Italian banking system.

In 2012 Carige's problem loans increased from 7.3% to 8.5% (1) of total gross loans, reflecting the ongoing recession and the inspection the Bank of Italy conducted on major Italian banks' provisioning levels. Despite reporting lower numbers than the system average of 10.6% as at the same date (2), Moody's notes that the stock is nevertheless high for Carige. The rating agency said it expects further deterioration in asset quality in the remainder of 2013 and 2014, reflecting the abovementioned forecasts for Italian GDP. Moody's noted that coverage of problem loans has increased in recent years, going from a historical low of 35% in 2009 to 46% in 2012; the current levels are however still below the system average of 49%.

Moody's said that Carige's profitability and internal capital generation were weak. The group posted a consolidated net loss of Eur63 million in 2012, which compares with a net profit of Eur169 million in 2011; the loss was mainly due to extraordinary provisioning on both the insurance and banking operations of the group, but also benefitted from a Eur261 million non-recurring tax gain related to the reorganisation of the group structure. In the next two years Moody's expects pressure on Carige's profitability to remain high, given the persistency of a low-interest rate environment and still high loan loss charges.

During the review process, Moody's noted some progress from the bank in its planned sale of non-core assets, which is expected to strengthen the bank's capitalisation. In December 2012 Carige reported very low capital ratios; core tier 1 and tier 1 ratios stood at 6.7% and 7.4% respectively, in line with 2011 figures (3). The bank announced its intention to raise around Eur800 million of new capital; the bulk of the increase is planned to come from the sale of its insurance subsidiaries and other non-core assets, combined with a possible rights issue by March 2014 should the sale not be sufficient. This capital increase of Eur800 million is expected to increase the bank's core tier 1 ratio to around 10% under Basel 2. Moody's believes that this level of capital would be just adequate to withstand the pressures coming from a prolonged recessionary environment.

The long-term issuer and deposit ratings were confirmed at Ba2, reflecting the BCA of ba3, as well as Moody's assessment of moderate probability of extraordinary systemic (government) support in terms of capital and/or liquidity. The assessment takes into consideration the size and importance in the banking system of Carige, with national market shares of 1.2% and 1.3% for loans and deposits respectively (22% and 19% in its core territory of Liguria). This results in a one-notch uplift from the standalone BCA of ba3 to the issuer rating of Ba2.

The outlook is negative, in line with most Italian rated banks, reflecting macro-economic pressures highlighted in Moody's GDP forecasts for the country.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Any failure to fully implement the planned capital raising could put downward's pressure on Carige's standalone BCA; additionally, any further material deterioration in the bank's asset quality, or other net losses, would put further downward pressure on Carige's standalone BCA.

Any downgrade of the standalone BCA would result in a downgrade of Carige's long-term deposit ratings.

At present, there is no upwards pressure on the ratings, as highlighted by the negative outlook. However, the following factors could have a positive impact on Carige's standalone BCA in the medium term: (i) material improvements on core capital, such as common equity ratio under Basel III (fully-loaded) above 10%; (ii) a material decline in inflow of new problem loans, together with a substantial reduction of the stock; and (iii) a return to sustainable profitability both on pre-provision and net profit level.

An upgrade of the standalone BCA would also add upward pressure to Carige's deposit ratings.

The principal methodology used in this rating was Global Banks, published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

(1) Problem loans include non-performing loans (sofferenze), watchlist (incagli), restructured (ristrutturati), and past-due (scaduti); Moody's adjusts these numbers and only incorporates 30% of the watchlist category as an estimate of those over 90 days overdue.

(2) Source: Bank of Italy's 5th Financial Stability Report, published in April 2013.

(3) Unless otherwise noted, data in this report are from Company data or Moody's Financial Metrics.

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.

Edoardo Calandro
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 confirms Banca Carige's Ba2 long-term issuer and deposit ratings; outlook is now negative
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