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Rating Action:

Moody's downgrades Banca Monte dei Paschi di Siena to A2/D+; outlook stable

20 Oct 2010

MPS Capital Services downgraded to A3

Milan, October 20, 2010 -- Moody's Investors Services has today downgraded the long-term deposit rating of Banca Monte dei Paschi di Siena (MPS) to A2 from A1 and its bank financial strength rating (BFSR) to D+ from C- (equivalent to a Baa3 on the long-term rating scale, down from Baa2). The Prime-1 short-term deposit rating has been affirmed. All ratings now carry a stable outlook.

The following ratings were downgraded:

Banca Monte Dei Paschi Di Siena

- Long-term debt and deposit ratings to A2 from A1

- Bank financial strength rating to D+ from C-

-Subordinated debt to A3 from A2

- Tier III medium-term notes to P(Baa1) from P(A3)

- Junior subordinated debt to Ba1 from Baa3

- Preferred stock to Ba3 from Ba2

MPS Capital Services had the following changes:

- Long-term deposit ratings downgraded to A3 from A2

- Short-term deposit rating downgraded to Prime-2 from Prime-1

- Bank financial strength rating lowered within the D+ category, now translating to a Ba1 from previously Baa3 on the long-term rating scale

RATINGS RATIONALE

Moody's said that the downgrade of MPS's ratings reflects the sizeable challenges for the bank stemming in particular from (i) its deteriorating asset quality; combined with (ii) its relatively modest capitalisation which is affected by (iii) very low internal capital generation and (iv) Moody's opinion of challenges in raising capital externally.

The rating agency recognises the progress made in integrating Antonveneta since its acquisition in 2008, but actual results -- both in terms of asset quality and profitability - remain modest and below those of its C- rated peers. Problem loans, as adjusted by Moody's, increased to 9.4% in June 2010, well above the Italian peer average, and are likely to further increase in coming quarters. Moreover, underlying profitability, excluding non-operating items, has been poor over the last two years (net income was just 0.1% of risk-weighted assets in 2009) and, despite some evidence of improvement so far in 2010, is unlikely in Moody's opinion to reach acceptable levels before 2012 given the fragile economic recovery that we expect in Italy. The bank's efficiency also compares unfavourably to most peers, with a cost to income ratio of 73% in 2009 (68% in June 2010), although the now well advanced integration of Antonveneta should provide scope for further increased cost-efficiency. The bank's Tier 1 ratio of 7.8% (expected 8.2% in September 2010) and its Core Tier 1 ratio of 7.3% in June 2010 were modest in light of the amount of problem loans. The bank is taking measures to strengthen its capital adequacy through asset disposals, and these measures could result in a Tier 1 ratio during 2011 significantly above current levels. However there is also the possibility that next year the bank may wish to repay the costly government hybrid -- Tremonti Bonds -- which were taken out in 2009, a move which would reduce the Tier 1 ratio by about 160 bp. Moody's said that the evolution of capital adequacy is a key driver for MPS's rating, even more so given the constraints on internal and external capital generation.

The downgrade of MPS's deposit ratings by one notch incorporates the continuing significant uplift due to systemic support that is incorporated in the bank's ratings: four notches from the Baa3 standalone rating, the highest in Italy with Banco Popolare.

The key factors supporting the current ratings and its stable outlook remain (i) the bank's sound franchise as the third largest Italian bank, with a market share in deposits and loans of about 8%; (ii) a sound liquidity and retail banking profile, in line with the Italian banking system and (iii) Moody's expectations of improvement in the bank's financial profile over a medium-term time horizon.

MPS's BFSR could be upgraded if the bank demonstrates that it can achieve a further significant strengthening in its financial profile, including (i) a Core Tier 1 ratio notably and sustainably above 7.5%, excluding the government hybrid; (ii) a cost-to-income ratio below 65%; (iii) net income above 1% of risk-weighted assets and (iv) problem loans below 6.5% of loans. The BFSR is however unlikely to improve to such an extent to cause a corresponding upgrade of the long-term debt and deposit ratings, but would rather need to strengthen by more than one notch to have some impact on the debt/deposit ratings.

MPS's BFSR could become more weakly positioned in the D+ category if improvements are lower than anticipated by Moody's, with in particular a Core Tier 1, excluding the government hybrid, below 7%. Should the earnings continue to trend downwards throughout 2011 this would also add some concern. This, or a lower expectation of systemic support, could result in a downgrade of the deposit ratings.

The key factual elements underpinning the rating action are the bank's Tier 1, problem loans and net income as stated in its audited financial statements as at December 2009 and June 2010.

MPS Capital Services

Moody's has also downgraded the long-term deposit rating of MPS Capital Services to A3 from A2 and its short-term deposit rating to Prime-2 from Prime-1. The BFSR has been affirmed at D+ but lowered within the D+ category to Ba1 from Baa3.

MPS Capital Services is the group's capital markets and corporate banking arm. The rating action primarily reflects the bank's deteriorating asset quality, with adjusted problem loans of 15% of loans in 2009.

The key factors supporting the current rating are the bank's very close integration as a division of the Montepaschi Group, resulting in significant support from the parent.

The BFSR could become more strongly positioned in the D+ category in the event that MPS Capital Services significantly reduces its key bad loans to loans ratio below 6.5%. Given the current four-notch uplift from support, an upgrade of the deposit rating is unlikely at present, unless the parent is upgraded.

Evidence of the bank losing ground in medium-term lending while exhibiting an increased risk profile from its capital markets activities could exert downward pressure on the BFSR. The long-term deposit rating could be downgraded in the event of a downgrade of the long-term deposit rating of MPS.

The principal methodologies used in rating Banca Monte dei Paschi di Siena were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Insurance Hybrid Securities and Subordinated Debt published in January 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

The last rating action on Banca Monte dei Paschi di Siena was implemented on 5 March 2010, when a bank's junior subordinated security was corrected to Baa3 from A2.

Banca Monte dei Paschi di Siena is headquartered in Siena, Italy. At 30 June 2010 it had total assets of EUR 248 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating iare the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Milan
Carlo Gori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy

Moody's downgrades Banca Monte dei Paschi di Siena to A2/D+; outlook stable
No Related Data.
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