Moody’s is taking aim at the PIIGS all over again.  This time the company is firing off at the Italian banks rather than the Spanish, Portuguese, or the Greek banks.  Moody’s noted, “Moody’s announced rating actions on a number of Italian financial institutions and affected credits across several asset classes.”  Today’s downgrades were from one to four notches regarding the long-term debt and deposit ratings for 26 Italian banks.  This includes 5 banks which are part of larger groups.

Monday’s downgrades reflect the standalone credit assessments rather than changes in Moody’s assumptions about levels of third party support, including government support.  What investors needs to look at most is that the rating outlooks for all of these downgraded banks are NEGATIVE, an indication of more downgrades being likely to come.  Moody’s has now changed its rating outlooks for the standalone BFSR of five Italian banks to negative from stable; the debt and deposit ratings for 9 more Italian banks remain on review for further downgrade.

The debt and deposit ratings was cut by 1 notch for 10 of the 26 banks, also cut by 2 notches for 8 banks, also by 3 notches for 6 banks, and by 4 notches for 2 of the banks. Another issues is that the short-term ratings for 21 banks have also been downgraded by 1 to 2 notches, which is said to be triggered by the long-term rating downgrades.

Moody’s showed that Italy’s banks are now among the lowest rated in the more advanced European economies due to their susceptibility to adverse operating conditions in Italy and Europe.  Italy’s economy is back in recession and austerity is cutting near-term economic demand.  Asset-quality challenges and weaker net profits persist as loan-loss provisions are rising.  Another issue is restricted access to market funding that will force banks to reduce assets.  Also listed are risks for creditors from potential weaknesses in governance, controls and risk management.

The downgrade further noted, “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. These risks are exacerbated by investor concerns over the sustainability of the Italian government’s debt burden…”

24/7 Wall St. has warned over and over that these credit ratings agencies are not finished with their downgrade cycle.  It will stop when these nations get their fiscal houses in order.  Sadly, for things to get in order the economies will have to suffer to a lower reset button.

The full Italian bank downgrade list is here.

JON C. OGG

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