S&P downgrades Italian banks on deeper recession

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By Nathalie Tadena

Standard & Poor's Ratings Services raised its economic-risk score on Italy and downgraded 15 Italian banks, noting the country faces a deeper and more prolonged recession than the firm had originally anticipated.

S&P also lowered its outlook on one bank and removed ratings on four of them from negative Credit Watch.

A severe recession likely will increase Italian banks' problem assets in 2012 and 2013 to levels higher than anticipated, and higher than other banks in Europe, the ratings firm said.

At the same time, the banks' coverage of problem assets has weakened in the past few years, S&P said.

S&P revised its economic-risk score, which is a component of its banking-industry country-risk assessment, to 5 from 4. The firm now views credit risk in the Italian economy at "high risk" from its earlier assessment of "intermediate risk." It affirmed Italy's BICRA at group 4.

The ratings firm now expects Italy's gross domestic product to decline 2.1% in 2012 and 0.4% next year. S&P noted the state of the Italian economy, which hasn't recovered since its 2008-09 recession, is increasing the vulnerability of its banks' asset quality.

S&P projects Italian banks' problem assets, or the sum of bad loans and watchlist loans, will rise to EUR218 billion by the end of 2013, compared with EUR166 billion at the end of 2011. Italian banks' problem assets at year-end 2011 had already more than doubled from EUR75 billion in 2008, owing to the recession, the firm added. The firm also said Italian banks' coverage of problem assets through provisioning has decreased further over the past few years.

Last month, peer Fitch Ratings affirmed Italy's long-term ratings at A-minus, pointing to the country's structural reforms to enhance the growth potential of the economy and commitment to reducing the budget deficit and public debt.

Meanwhile, Moody's Investors Service downgraded Italy's government-bond rating two notches to Baa2 in July, saying the country faces a greater likelihood of a further sharp increase in funding costs or loss of market access given euro-area risks and that its economy has continued to deteriorate. Moody's also lowered its long-term ratings on 10 Italian banks and its issuer ratings on three Italian financial institutions by one to two notches last month.

In January, S&P cut Italy's rating by two notches to triple-B-plus.

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