Banca Carige S.p.A. -- Moody's: Italy's banking system outlook remains negative, adverse trends remain evident

Milan, November 19, 2012 -- The outlook for Italy's banking system remains negative, says Moody's Investors Service in a new Banking System Outlook published today. The main drivers of the outlook are (1) the rating agency's expectations of continued challenging operating conditions for the banks; (2) further rapid asset-quality deterioration; (3) continued weak profitability and (4) their restricted access to market funding that is unlikely to normalise over the outlook period. The rating agency noted that many of these negative rating drivers have intensified during the course of 2012, and that this trend is likely to persist. While the banks have strengthened their capital positions, capital levels remain vulnerable and below those of other large European banking systems. The combination of continued negative developments, some of which are beyond expectations previously reflected in Moody's base scenario, and continued risks skewed to the downside, underpin the negative outlook and the pressures on the Italian banking system.

The new report, entitled "Banking System Outlook: Italy", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

Moody's says that the operating conditions for banks are difficult and that they will likely remain challenging over the 12-18 month outlook period. The rating agency expects Italy's GDP to contract by between -3% and -2% in 2012 and -1% and 0% in 2013 [source: Moody's Update to the Global Macro-Risk Outlook 2012-14, published in November 2012], with recessionary risks skewed to the downside.

Moody's expects that the banks' asset quality will continue to deteriorate over the outlook period, from already weak levels. The ongoing recession is the key driver of asset-quality deterioration, which has particularly affected corporate borrowers. Aggregate system problem loans reached 11% of total loans in 2011, from 4.6% in 2007 [source: Bank of Italy, Annual Report 2011]. Over the first six months of 2012, this ratio increased more rapidly than the rating agency had anticipated, to approximately 12.3% at June 2012 [source: Bank of Italy, Financial Stability Report, November 2012]. This trend shows no signs of abating; combined with bank deleveraging and a corresponding contraction in the supply of credit, further pressures on asset quality are inevitable.

The banks' already modest profitability will also continue to weaken, as loan-loss provisions will increase and continue to absorb a higher portion of banks' moderate pre-provision earnings. This limits the banks' ability to build capital from internal sources, leaving them increasingly vulnerable to the continued asset-quality deterioration.

Lastly, euro area-wide pressures will continue to restrict the banks' access to market funding. Although there has been some easing in market access in recent months, the rating agency said that this is unlikely to normalise over the outlook period, and market access remains highly confidence-sensitive. Italian banks are the second-largest borrowers from the European Central Bank (ECB) in absolute terms. The banks are now working to reduce the size of their loan portfolios to help lower their reliance on the ECB. However, Moody's notes that the degree of deleveraging necessary to materially reduce ongoing funding needs might have adverse consequences for the banks' franchises and earnings.

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Carlo Gori Vice President - Senior Analyst Financial Institutions Group Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy Telephone:+39-02-9148-1100Johannes Wassenberg MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy Telephone:+39-02-9148-1100(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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