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Moody's downgrades CariBolzano to Ba2 from Ba1

July 7, 2014

-- Moody's Investors Service has today downgraded Cassa di Risparmio di Bolzano -- Suedtiroler Sparkasse's (CariBolzano) long-term deposit and issuer ratings to Ba2 from Ba1, and affirmed the bank's short-term deposit ratings of Not-Prime. At the same time, the rating agency downgraded CariBolzano's standalone bank financial strength rating (BFSR) to D, which is equivalent to a standalone baseline credit assessment (BCA) of ba2, (from D+/ba1). The outlook on the standalone BFSR and on the long-term deposit and issuer ratings was changed to stable from negative.


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 December 2013 from 5.5% as at December 2011 (see notes 1 and 2 at the end of this press release).

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 December 2013 from 42% as at December 2011.

Moody's says that the current level of coverage is still below the best practice of the highest rated banks in Italy.

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 EUR126 million in 2013

(2012: EUR149 million and 2011: EUR145 million), which the bank compensated with non-recurring gains derived from the sale of government bonds. The above-mentioned increased volume of problem loans and coverage levels led to a significant increase in cost of risk, which increased 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 EUR29 million in 2013, which compares with a net profit of EUR4 million in 2012 and EUR11 million in 2011. Moody's expects asset quality to continue to weigh significantly on CariBolzano's profitability in 2014.

Moody's however notes that CariBolzano's bank's Tier 1 ratio stood at 9.7% as at December 2013, 200 basis points higher than the 7.7% reported as of December 2011, supported by a substantial capital increase in 2012 and deleveraging. The rating agency expects the bank's capital to remain stable, considering the issuer's limited internal capital generation.

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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Source: EMBIN (Emerging Markets Business Information News)

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