Italy banks slapped with downgrades

UniCredit, Italy’s biggest bank, had its long-term debt rating lowered one step to A3, Moody’s said in a spreadsheet on its website. Milan-based Intesa, the nation’s second- largest lender, also was downgraded to A3 from A2.

“Italian banks are particularly vulnerable to adverse operating conditions, which are likely to cause further asset quality deterioration, earnings pressure, and restricted market funding access,” Moody’s said. “These risks are exacerbated by investor concerns over the sustainability of the Italian government’s debt burden, which has contributed to the difficult wholesale funding conditions faced by Italian banks.”

Banks that are downgraded may need to pay more to borrow and post additional collateral in their derivatives businesses. ABI, the Italian banking association, on Tuesday said the downgrades were “irresponsible” and an “aggression” on Italy. Moody’s decided on February 13 to cut the credit rating of Italy and five other countries, including Spain, on doubts over the euro region’s ability to deal with the debt crisis.

Shares of the lenders were mixed on Tuesday on speculation that their slump in May already reflects the weaker outlook. Carlo Mereels, a credit analyst at RBC Capital markets, said in a note on Tuesday that the downgrades were “less than what Moody’s had previously flagged.”

Italy was lowered by Moody’s to A3, or four steps above junk, from A2 with a negative outlook in February. “The cut was largely expected and the fact that all the banks we cover remain above the investment grade threshold is, at the end, a good news in relative terms,” analysts at Fidentiis Equities wrote in a note to clients on Tuesday.