Moody's said that the one-notch lowering of CariBolzano's standalone BCA reflects the bank's deteriorated asset quality and profitability, which are only partly offset by the bank's increased regulatory capital ratios and problem loan reserve coverage.
CariBolzano's asset quality has deteriorated significantly since 2011, in line with the trend in the Italian banking system. Problem loans as a percentage of gross loans rose to 9.0% as at
Moody's forecasts a weak recovery for the Italian economy, estimating modest GDP growth of between 0% and 1.0% in 2014 and between 1% and 2% in 2015 (see note 3 at the end of this report). Coverage of problem loans has also increased in the past two years, with loan loss reserves rising to 52% of problem loans as at
Moody's says that the current level of coverage is still below the best practice of the highest rated banks in
The significant deterioration of CariBolzano's asset quality has also impacted the bank's profitability. In the past three years, gross loans declined by 6%, while at the same time a significantly higher portion of loans became non-performing and non-interest generating; this contributed to the bank's net interest income declining to
171 basis points (bps) in 2013 (2012: 110 bps and 2011: 53 bps).
The combination of pre-provision profitability that has been stabilised by non-recurring profits, and substantially increased loan loss charges, led to CariBolzano recording a net loss of
Moody's however notes that CariBolzano's bank's Tier 1 ratio stood at 9.7% as at
The downgrade of CariBolzano's long-term issuer and deposit rating reflects the lowered standalone BCA, as well as Moody's unchanged assumptions of low probability of systemic (government) support, which continues to provide no uplift to the bank's deposit and issuer ratings.
CariBolzano's rating outlook is now stable, reflecting Moody's expectation of limited further asset quality erosion and an expectation that profitability will stabilise, albeit at a weak level, for the next
12-18 months -- all of which is already factored in the bank's BCA of ba2.
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