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Rating Action:

Moody's downgrades Banca Monte dei Paschi di Siena to Ba2/NP from Baa3/P-3; outlook negative

Global Credit Research - 18 Oct 2012

MPS Capital Services downgraded to the same level

Milan, October 18, 2012 -- Moody's Investors Service has today downgraded the long-term debt and deposit ratings of Banca Monte dei Paschi di Siena (MPS) by two notches to Ba2 from Baa3, the short-term rating to Not-Prime from Prime-3 and the standalone bank financial strength rating (BFSR) to E, equivalent to a standalone baseline credit assessment of caa1, from D/ba2. The outlook remains negative.

The lowering of MPS's standalone risk measures reflect Moody's view that, notwithstanding the prospective EUR1.5 billion capital injection by the Italian government, there remains a material probability that the bank will need to seek further external support over the rating horizon. As a result of the stress test jointly undertaken by the European Banking Authority (EBA) and the Bank of Italy which directed banks to have a minimum 9% Core Tier 1 ratio, MPS has not been able to increase its capital base to the required level and hence elicited government's assistance. In the event of a further deterioration of its asset quality, which Moody's considers is likely given the weak growth prospects for Italy's economy and the EU operating environment, there is a strong probability that the bank would not be able to generate sufficient capital internally to maintain regulatory capital levels.

The actions on MPS's deposit ratings reflect the increase in risk to depositors and other creditors implied by the bank's weak standalone strength, partially offset by the heightened likelihood of support evidenced by the

government's recent actions.

RATINGS RATIONALE

MPS's asset quality is weak and will, in Moody's view, continue to deteriorate given the Italian economy's weak growth prospects during the remainder of 2012 and for 2013. MPS's reported problem loans have risen to 17% of total loans in June 2012 and are significantly above the around 13% average of Italian banks rated by Moody's. Moody's recently-published GDP growth outlook for Italy estimates a range of -2.5% to -1.5% for 2012, and a range of -1.0% to 0% for 2013, with significant downside risks to these forecasts. Asset impairments generally follow economic downturns with a lag of up to 12-18 months, which would indicate that MPS's asset quality is likely to continue to deteriorate throughout 2013 and 2014.

Against this negative asset-quality outlook, Moody's notes MPS's weak internal capital-generation capacity. MPS has not been able to generate capital internally between 2011 and H1 2012, even excluding EUR5.8 billion goodwill impairments from the bank's net result. MPS's weak profitability and fragile asset quality exacerbate its weak funding position, leaving it unable to access the capital markets and in consequence making MPS highly reliant on the European Central Bank for funding (at EUR31.5 billion as of June 2012). This exposes it to the ECB's decision-making process, which it cannot fully influence.

Moody's understands that the bank's business plan aims to address these weaknesses through measures such as deleveraging to reduce the high consumer and corporate loan-to-deposit ratio to 110% in turn reducing reliance on central bank funding, and cost-cutting to improve profitability. However, Moody's believes that the plan is subject to significant execution risk, given the challenging operating environment. Worsening macroeconomic and market conditions compared with the plan's assumptions (a distinct possibility given that Italy's recent GDP forecasts have already deteriorated) would constrain the bank's turnaround.

These concerns translate into a standalone credit assessment of E/caa1, indicating a heightened risk over the medium term that MPS may require further external support notwithstanding its ostensibly strong capital position postinjection. In Moody's view, this is likely to take the form of systemic (government) support, in view of the past challenges that MPS's shareholders have faced when attempting to recapitalise MPS. The E/caa1 standalone credit assessment reflects the positive impact of the planned capital strengthening from the government by year-end 2012, amounting to EUR1.5 billion of capital that the Italian government has committed to inject , increasing MPS's Core Tier 1 (pro forma for the European Banking Authority's requirements) by around 156 bps to 9.06%.

LONG-TERM DEBT AND DEPOSIT RATINGS

MPS's Ba2 debt and deposit ratings balance (1) the risk for bondholders stemming from MPS's heightened standalone risk profile against (2) the demonstrated willingness and ability of the Italian government to support this institution. The bank's bondholders' position in any potential renewed public recapitalisation would be subject to political decisions not simply in Italy but potentially to the European Commission's scrutiny, for example since any further state aid/support would likely require the approval from the European Commission which might require burden sharing with creditors and other measures that may weaken MPS's franchise. Moody's has therefore incorporated five-notches of uplift of the debt/deposit ratings from its E/caa1 standalone credit assessment but downgraded the bank's senior debt ratings to Ba2 with a negative outlook from Baa3, negative outlook, to reflect this risk.

SUBORDINATED DEBT AND HYBRID RATINGS

Given the heightened risk of burden sharing for junior creditors should MPS require further external support, subordinated debt and hybrid ratings are notched off the caa1 standalone baseline credit assessment, with senior subordinated debt and Tier III rated Caa2, junior subordinated debt at Caa3 and preferred stock at Ca.

WHAT COULD MOVE THE RATING UP/DOWN

At present, there is limited upwards pressure on the debt and deposit ratings; however, the following factors could merit a higher standalone credit assessment over the medium term (1) the successful implementation of the business plan, resulting in notably improved profitability and internal capital generation; and (2) significant shareholder's capital injections improving the resilience against further asset-quality deterioration and reducing the risk of public recapitalisations with the attached uncertainties.

However, an improvement in the standalone credit assessment would be unlikely to result in an upgrade of the deposit rating, given the very high level of systemic support uplift which Moody's incorporates into the deposit ratings.

Conversely, downwards pressure might develop on the ratings following (1) challenges in executing the business plan, for example, because of a more difficult operating environment; or (2) a weakening of Italy's capacity to extend systemic support. Equally, if the need for renewed public support becomes more evident and visible, this might exert pressure on the standalone ratings, as well as the debt and deposit ratings.

MPS CAPITAL SERVICES

Moody's has downgraded the group's corporate banking subsidiary MPS Capital Services to Ba2/Not-Prime with a negative outlook, from Baa3/Prime-3 and its standalone BFSR to E/caa1 from D-/ba3. The ratings are at the same level of the parent, reflecting the bank's close integration with its parent.

RATING OVERVIEW

1. MPS (ratings/outlook, if applicable)

- Senior unsecured debt and EMTN, and bank deposits: Ba2; (P)Ba2 / negative

- Short-term debt and deposit: NP

- Subordinate debt and EMTN: Caa2; (P)Caa2 / negative

- Tier III EMTN: (P) Caa2 / negative;

- Junior subordinate and EMTN: Caa3(hyb); (P)Caa3 /negative

- Preferred stock: Ca (hyb) / negative

- Bank Financial Strength Rating: E / stable

- Baseline Credit Assessment: caa1

2. MPS Capital Services

- Bank deposits: Ba2 / negative; NP

- Bank Financial Strength Rating: E / stable

- Baseline Credit Assessment: caa1

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. 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 relevant 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 relevant 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 relevant 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.

The rating/s has/have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings 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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

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Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

Carlo Gori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Johannes Wassenberg
MD - Banking
Financial Institutions Group
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Releasing Office:
Moody's Italia S.r.l
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Italy
Telephone:+39-02-9148-1100

Moody's downgrades Banca Monte dei Paschi di Siena to Ba2/NP from Baa3/P-3; outlook negative
No Related Data.

 

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