Milan, May 17, 2011 -- Moody's Investors Service has today placed on review for possible
downgrade UniCredit's C standalone bank financial strength rating
(BFSR; mapping to A3 on the long-term rating scale) and its
Aa3 long-term deposit and senior debt ratings. The decision
to review the standalone bank financial strength rating for possible downgrade
reflects Moody's concerns regarding:
(i) UniCredit group's core domestic operations in Italy, where
its profitability has been (and continues to be) affected by the very
high, and sustained increase in, the level of problem loans,
which exceed those of its peers; and
(ii) The extent to which the bank's overall profitability and asset-quality
measures are likely to remain at levels more compatible with a lower standalone
rating for a sustained period.
In addition, the decision to review the long-term ratings
for possible downgrade follows the review for downgrade of the standalone
rating. The bank's Prime-1 short-term deposit
and debt ratings are unaffected by this rating action.
RATIONALE FOR REVIEW OF STANDALONE BFSR
UniCredit reported a pretax profit of EUR2.5 billion for 2010,
compared with EUR3.3 billion in 2009. The result reflected
lower revenues and in particular net interest and trading income,
only partly offset by lower loan-loss charges. Moody's
says that it expects profitability to improve in 2011; results for
Q1 2011 showed significant improvement on both Q4 2010 and Q1 2010,
primarily driven by lower provisioning costs.
However, the rating agency says that achieving a significant and
sustained improvement of the bank's risk-adjusted profitability
-- compatible with an A3 equivalent standalone rating,
as currently -- may prove challenging. Part of this
challenge is the modest pace of economic growth in Italy, estimated
by Moody's at around 1% of GDP in 2011, the group's
largest single market. Pre-tax profit at the end of 2007
stood at EUR 10.5 billion, and has declined by around 76%
since then. The rating agency said that it expects that profitability
will be unlikely to return to previous levels for some years.
Furthermore, UniCredit's underwriting performance has been
weaker than that of many of its peers. Impaired loans, as
reported by the bank, stood at 11.4% of gross loans
at the end of 2010, while this figure for the 10 largest Italian
banks rated by Moody's averaged 9%.
In light of these challenges, the rating agency says that its review
will also focus on the development of the group's key strategic
priorities and their probable effectiveness in addressing these issues.
Loan-loss charges fell by 17% in 2010 -- although
they remain substantial at EUR6.9 billion -- and
the declining trend continued in Q1 2011. However, gross
problem loans continued to rise in Q1 2011, reaching EUR69 billion,
bringing to question the sufficiency of loss provisioning which stood
at 45% at Q1 2011. Although the rate of increase in these
has declined, Moody's noted that achieving a meaningful reduction
in problem loans will take considerable time, particularly given
that 65% of these are in Italy, where loan workout times
are lengthy. Additionally Moody's noted that impaired loans
stood at 6.2% of gross loans at the end of 2007, again
providing evidence of the magnitude of the deterioration in the group's
asset quality since then, and of the time that may be required to
return asset quality to pre-crisis levels.
While noting the concerns above, Moody's also notes that UniCredit
has made considerable progress in strengthening its capital adequacy in
recent years, with the core Tier 1 ratio reaching 9.06%
at end-Q1 2011. In addition, the bank's liquidity
remains sound, as indicated by its high reliance on retail funding,
manageable maturity profile of wholesale funding, and substantial
eligible securities available.
With regards to strategy, Moody's notes that there have been
several changes in the senior management of UniCredit in recent months.
In December 2010, the bank announced strategic guidelines,
which are due to be presented to the financial community during 2011.Moody's
says that the detail of these guidelines -- and the extent
to which they may address issues regarding profitability and asset quality
-- will be an important issue considered in the review.
RATIONALE FOR REVIEW OF LONG-TERM RATINGS
Moody's says that the review for downgrade of the long-term
deposit and debt ratings reflects the review for possible downgrade of
the standalone financial strength rating. The rating agency also
notes that UniCredit's long-term ratings currently benefit
from three notches of rating uplift given a very high expectation of systemic
support; this uplift was increased to three from two notches during
the crisis. The rating agency says that it expects that the support
uplift will eventually return to pre-crisis levels, exerting
further downward pressure on these ratings.
Moody's says that any impact of this rating action on subsidiaries
of UniCredit will be communicated through separate press releases in the
The following ratings were placed on review for possible downgrade:
- C standalone bank financial strength rating (BFSR; mapping
to A3 on the long-term rating scale);
- Aa3 long-term deposit and senior debt ratings;
- (P)Aa3 senior unsecured MTN rating;
- A1 subordinated debt rating;
- (P)A1 subordinate MTN rating;
- (P)A1 Tier III MTN rating;
- Baa1(hyb) junior subordinate debt rating;
- (P)Baa1(hyb) junior subordinate MTN rating;
- Baa3(hyb) preferred stock rating.
Last rating action on UniCredit SpA was implemented on 6 August 2009,
when the bank's BFSR was downgraded to C from C+.
The principal methodologies used in this rating were Bank Financial Strength
Ratings: Global Methodology published in February 2007, and
Incorporation of Joint-Default Analysis into Moody's Bank Ratings:
A Refined Methodology published in March 2007.
The bank is headquartered in Milan, Italy. At March 31st
2011 it had total assets of EUR 911 billion.
Senior Vice President
Financial Institutions Group
Moody's Italia S.r.l
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
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Moody's reviews for possible downgrade UniCredit's Aa3/C ratings (Italy)
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