Moody's reviews for possible downgrade UniCredit's Aa3/C ratings (Italy)

Milan, May 17, 2011 — Moody’s Investors Service has today placed on review for possible downgrade UniCredit’s C standalone bank financialrnstrength rating (BFSR; mapping to A3 on the long-term rating scale) and its Aa3 long-term deposit and senior debt ratings. rnrnThe decision to review the standalone bank financial strength rating for possible downgrade reflects Moody’s concerns regarding:rn(i) UniCredit group’s core domestic operations in Italy, where its profitability has been (and continues to be) affected by the very high, and sustained increase in, the level of problem loans, which exceed those of its peers; andrn(ii) The extent to which the bank’s overall profitability and asset-quality measures are likely to remain at levels more compatible with a lowerrnstandalone rating for a sustained period.rnrnIn addition, the decision to review the long-term ratings for possible downgrade follows the review for downgrade of the standalone rating. The bank’s Prime-1 short-term deposit and debt ratings are unaffected by this rating action.rnrnRATIONALE FOR REVIEW OF STANDALONE BFSRrnrnUniCredit reported a pretax profit of EUR2.5 billion for 2010, compared with EUR3.3 billion in 2009. The result reflected lower revenues and inrnparticular net interest and trading income, only partly offset by lower loan-loss charges. Moody’s says that it expects profitability to improve in 2011; results for Q1 2011 showed significant improvement on both Q4 2010 and Q1 2010, primarily driven by lower provisioning costs.rnrnHowever, the rating agency says that achieving a significant and sustained improvement of the bank’s risk-adjusted profitability — compatible with an A3 equivalent standalone rating, as currently — may prove challenging. Part of this challenge is the modest pace of economic growth in Italy, estimated by Moody’s at around 1% of GDP in 2011, the group’s largest single market. Pre-tax profit at the end of 2007 stood at EUR 10.5 billion, and has declined by around 76% since then. The rating agency said that it expects that profitability will be unlikely to return to previous levels for some years.rnrnFurthermore, UniCredit’s underwriting performance has been weaker than that of many of its peers. Impaired loans, as reported by the bank,rnstood at 11.4% of gross loans at the end of 2010, while this figure for the 10 largest Italian banks rated by Moody’s averaged 9%.rnrnIn light of these challenges, the rating agency says that its review will also focus on the development of the group’s key strategic priorities andrntheir probable effectiveness in addressing these issues.rnrnLoan-loss charges fell by 17% in 2010 — although they remain substantial at EUR6.9 billion — and the declining trend continued in Q1 2011.rnrnHowever, gross problem loans continued to rise in Q1 2011, reaching EUR69 billion, bringing to question the sufficiency of loss provisioningrnwhich stood at 45% at Q1 2011. Although the rate of increase in these has declined, Moody’s noted that achieving a meaningful reduction inrnproblem loans will take considerable time, particularly given that 65% of these are in Italy, where loan workout times are lengthy. AdditionallyrnMoody’s noted that impaired loans stood at 6.2% of gross loans at the end of 2007, again providing evidence of the magnitude of therndeterioration in the group’s asset quality since then, and of the time that may be required to return asset quality to pre-crisis levels.rnrnWhile noting the concerns above, Moody’s also notes that UniCredit has made considerable progress in strengthening its capital adequacy inrnrecent years, with the core Tier 1 ratio reaching 9.06% at end-Q1 2011. In addition, the bank’s liquidity remains sound, as indicated by its high reliance on retail funding, manageable maturity profile of wholesale funding, and substantial eligible securities available.rnrnWith regards to strategy, Moody’s notes that there have been several changes in the senior management of UniCredit in recent months. InrnDecember 2010, the bank announced strategic guidelines, which are due to be presented to the financial community during 2011.Moody’s says that the detail of these guidelines — and the extent to which they may address issues regarding profitability and asset quality — will be anrnimportant issue considered in the review.rnrnRATIONALE FOR REVIEW OF LONG-TERM RATINGSrnrnMoody’s says that the review for downgrade of the long-term deposit and debt ratings reflects the review for possible downgrade of thernstandalone financial strength rating. The rating agency also notes that UniCredit’s long-term ratings currently benefit from three notches ofrnrating uplift given a very high expectation of systemic support; this uplift was increased to three from two notches during the crisis. The rating agency says that it expects that the support uplift will eventually return to pre-crisis levels, exerting further downward pressure on these ratings.rnrnMoody’s says that any impact of this rating action on subsidiaries of UniCredit will be communicated through separate press releases in therncoming days.rnrnThe following ratings were placed on review for possible downgrade:rn- C standalone bank financial strength rating (BFSR; mapping to A3 on the long-term rating scale);rn- Aa3 long-term deposit and senior debt ratings;rn- (P)Aa3 senior unsecured MTN rating;rn- A1 subordinated debt rating;rn- (P)A1 subordinate MTN rating;rn- (P)A1 Tier III MTN rating;rn- Baa1(hyb) junior subordinate debt rating;rn- (P)Baa1(hyb) junior subordinate MTN rating;rn- Baa3(hyb) preferred stock rating.rnLast rating action on UniCredit SpA was implemented on 6 August 2009, when the bank’s BFSR was downgraded to C from C+.rnThe principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, andrnIncorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology published in March 2007.rnThe bank is headquartered in Milan, Italy. At March 31st 2011 it had total assets of EUR 911 billion.