Rating Action:
Moody's upgrades Banca Carige following the capital increase and the disposal of problem loans, concluding review
24 Dec 2019
Baseline credit assessment upgraded to caa1 from ca, outlook on long-term ratings is stable
Paris, December 24, 2019 -- Moody's Investors Service ("Moody's") upgraded the standalone baseline credit assessment (BCA) of Banca Carige S.p.A. ("Carige") to caa1 from ca, the long-term issuer rating to Caa2 from Caa3 and confirmed the long-term deposit rating Caa1. The rating action follows the successful completion on 20 December 2019 of (1) the €700 million capital increase; (2) the disposal €2.8 billion gross problem loans; and (3) the issuance of €200 million subordinated debt. The outlook on Carige's long-term deposit and issuer rating is stable.
The upgrade of the BCA and issuer rating concludes the review for upgrade initiated on 25 September 2019 (see " Moody's places Banca Carige's issuer ratings under review for upgrade following approval of restructuring plan";
Moody's places Banca Carige's issuer ratings under review for upgrade following approval of restructuring plan); the confirmation of the deposit rating concludes the review with direction uncertain initiated on 11 January 2019 (see " Moody's places Banca Carige's long-term ratings under review, direction uncertain";
Moody's places Banca Carige's long-term ratings under review, direction uncertain).
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
Carige's BCA was upgraded to reflect the successful completion on 20 December 2019 of the capital strengthening plan approved on 20 September 2019 by Carige's Extraordinary Shareholders' Meeting, which included: (1) the conversion into ordinary shares of €313.2 million subordinated debt underwritten on 30 November 2018 by the Voluntary Intervention Scheme of the Italian Interbank Deposit Protection Fund (FITD); (2) a €63 million capital increase reserved for Cassa Centrale Banca S.p.A.; (3) an €85 million capital increase reserved for current shareholders with an underwriting commitment from the FITD; (4) a €238.8 million capital increase reserved for the FITD; and (5) the issuance of €200 million Tier 2 subordinated debt.
Moody's estimates that the bank's capital stance has strengthened as Moody's-calculated tangible common equity ratio will likely increase above 10% (as of year-end) from a very low 5.2% in June 2019. This estimate takes into account the loss that the bank will incur for the full year 2019 as per its strategic plan (- €779 million), primarily driven by the high loan losses related to the disposal of problem loans.
In Moody's opinion Carige will maintain structurally weak profitability in the medium term even with the lower burden of problem loans, particularly as the bank will need to rebuild its commercial and funding franchise against the backdrop of a challenging economic environment. Moreover, Carige has some legal disputes outstanding, including with a minority of the bank's previous shareholders, which could entail losses for the bank in the future.
The upgrade of Carige's BCA also reflects the disposal of €2.8 billion of gross problem loans out of the total around €3.5 billion held by the bank to 100% state-owned entity AMCO, as this transaction was subject to the completion of the capital increase. Moody's estimates that the disposal will bring Carige's problem loans ratio to below 5% from a very high 23% in June 2019, below the Italian system average of circa 8%.
Carige's BCA currently incorporates one-notch negative adjustment for corporate behavior to reflect the dissenting view between shareholders, which have for many years plagued the sound corporate governance of the bank. Carige has been under temporary administration -- at the European Central Bank's initiative - since 2 January 2019 which is likely to last until the appointment of new management following the capital increase.
Moody's also removed the uplift of three notches and two notches respectively for government support on Carige's deposit rating and issuer rating, as Moody's believes that there is a low probability that the Italian government will provide support to the bank after the completion of the restructuring plan. Carige is currently benefiting from state support in the form of a guarantee on €2 billion of debt which will mature in 2020.