October 18, 2011 8:47 pm

S&P downgrades Italian bank ratings

Standard & Poor’s cut the ratings of three large Italian banks on Tuesday as part of a broader sector review following last month’s downgrade of Italy’s sovereign rating on weaker growth prospects.

S&P cut Monte dei Paschi di Siena, Italy’s third-largest bank by assets, from A minus to triple B plus, Banco Popolare from A minus to triple B and UBI Banca from A to A minus.

It lowered the ratings of a further 21 regional banks as part of a sector-wide downgrade citing concerns of higher funding costs as a result of high yields on Italian sovereign debt.

It confirmed the ratings of 18 other banks, including UniCredit and Intesa Sanpaolo, Italy’s largest banks by assets.

The actions follow several rating agency downgrades on the European banking sector, reflecting concerns about the impact of sovereign debt repayments as Europe struggles to contain its debt crisis, and weak global economic growth.

It also comes as Giuseppe Mussari, head of Italy’s banking association and chairman of Monte dei Paschi, voiced concern that EU bank recapitalisation plans being discussed in Brussels could exacerbate Italy’s sovereign debt crisis by forcing its banks to hold on to unnecessary amount of capital.

France moved to defend its triple A sovereign debt rating on Tuesday as a Moody’s warning of a possible cut in its outlook followed mounting concerns that Sunday’s European Union summit could fail to produce a solution to the single currency’s crisis.

Last week, S&P downgraded French bank BNP Paribas by one notch from double A to double A minus, citing the lender’s exposure to Greece and a difficult funding market. UBS had its rating cut by Fitch Ratings.

S&P said on Tuesday: “We think funding costs for the banks will increase noticeably because of higher yields on Italian sovereign debt.

“Furthermore, higher funding costs for both the banking and corporate sectors are likely to result in tighter credit conditions and weaker economic activity in the short-to-medium term.”

Italy’s 10-year bond yield rose 7 basis points to 5.867 per cent on Tuesday, the highest close since before the European Central Bank began buying Italian bonds on August 8 to try keep down borrowing costs.

S&P last month downgraded Italy for the first time in five years from A plus to A on concern that weakening economic growth and a “fragile” government cast doubt on its ability to reduce its debt of 120 per cent of GDP.

It said on Tuesday: “Funding costs for Italian banks and corporates will remain noticeably higher than those in other eurozone countries unless the Italian government implements workable growth enhancing measures and achieves a faster reduction in the public sector debt burden”.

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