S&P downgrades ratings of 34 Italian banks

Standard & Poor’s cut the credit ratings of 34 Italian banks, including significant financial institutions in the country, following a downgrade of Italy last month.

The move on Friday evening came in spite of efforts by the European Central Bank to extend financial support to the region’s banks.

The rating agency said it was concerned about the banks’ ability to finance given the broader problems facing Italy.

“Italy’s vulnerability to external financing risks has increased, given its high external public debt, resulting in Italian banks’ significantly diminished ability to roll over their wholesale debt,” the rating agency said.

For the banks themselves, S&P warned that it expected “persistently” weak profitability in the next few years and performance for core banking products that may fail to meet banks’ cost of capital.

“We believe this may be negative for the Italian banking industry’s stability,” the rating agency said.

UniCredit, Intesa Sanpaolo and Mediobanca were cut by two notches to triple B plus from single A, Banca Monte dei Paschi di Siena was cut by one notch to triple B from triple B plus, and Banca Carige was cut to triple B minus from triple B. The ratings have a negative outlook.

“Banks, of course, in highly indebted countries have a greater potential vulnerability than in others, but, by and large, Italian banks have been less hit by the financial crisis than the banks in many other European countries and ... recently many of them recapitalised,” Mario Monti, Italy’s prime minister, said on CNBC, the television channel, late on Friday.

Last year, some European banks were shut out of the wholesale funding markets when concerns about the stability of the region’s banking system mounted. The ECB has since made provisions for three-year loans to banks in the region, a programme known as the longer-term refinancing operations. After an initial dispersal in December, further action is expected at the end of this month.

This has helped to ease investors’ concerns about the eurozone banking system, sending the price of shares and financial sector debt up sharply this year.

The MSCI European Banks index is up nearly 20 per cent in the year to date, while an index of listed Italian banks has surged 64 per cent from a recent low in early January.

S&P last month downgraded the sovereign credit ratings of Italy by two notches to triple B plus from single A and assigned a negative outlook. At the time, the rating agency said the eurozone debt crisis could affect Italy’s ability to finance at a reasonable rate, which could hurt its economy and public finances.

Since reaching a high of 7.13 per cent on January 9, yields on 10-year Italian government bonds have fallen sharply. On Friday, however, they jumped 12 basis points to 5.59 per cent, according to Bloomberg data.