Moody's has restated that its view on the fundamental credit outlook for the Italian banking system remains negative, having been changed to negative from stable in May, reflecting the impact of the ongoing weak economic conditions on banks'  asset quality and profitability, says Moody's Investors Service in its new Banking System Outlook on Italy.
"Italy was the last major European banking system to be given a negative outlook in the current crisis, having proven to be more resilient than others in 2008 due to its lower exposure to toxic financial assets and capital market funding," said Henry MacNevin, a Moody's Team Leader for Italian bank ratings.
However, given that the financial crisis which has been ongoing for the last two years has now spread into the rest of the economy, Italian banks' asset quality and profitability have deteriorated and Moody's expects financial fundamentals to be further affected in 2009 and 2010.
Moody's expects bank financial strength ratings (BFSRs) in general to come under downward pressure, although the effect on deposit ratings is likely to be less severe due to demonstrated and expected systemic support. That said, unlike in other European countries, where major banks have often needed emergency recapitalisation from their governments, the rating agency does not expect strong government backing to be necessary in Italy unless a worse-than-expected scenario were to materialise.
Despite the banking system recording a reduction in profits, only two marginal players have needed to be rescued by other banks, with the major banks applying for a voluntary capital strengthening facility provided by the government. Moody's attributes the less severe impact of the financial crisis on the Italian system to the lower structured credit exposure of Italian banks and their strong focus on traditional, domestic banking products.
While access to market funding, and securitisations in particular, remains restricted or at best expensive, Moody's notes that this is mitigated by the relatively conservative business model of most Italian banks, which rely more on retail funding. "The banking system has entered the crisis with only a moderate capital position, but overall, despite the negative outlook, it remains one of the least affected in the EU," added Carlo Gori, a Moody's Senior Analyst, and author of the report.