RPT-Fitch: Carige's non-payment flags regulatory risks for hybrids

Fri Dec 6, 2013 6:50am EST

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Dec 6 (Reuters) - (The following statement was released by the rating agency)

The Bank of Italy's decision not to authorise the reimbursement of Banca Carige's subordinated convertible bond at maturity on 5 December 2013 highlights the regulatory risks for capital securities, Fitch Ratings says. The non-payment of principal for the 2003-2013 1.50% subordinated convertible bond has no immediate impact on the bank's ratings.

Carige's ratings could be negatively affected if this enforced non-payment resulted in material reputational damage for the bank and loss of investor and depositor confidence. However, this is not our base scenario.

The affected instrument (IT0003563035) is a dated upper Tier 2 subordinated bond issued to retail investors in 2003 and is not rated by Fitch. Under the Bank of Italy's prudential regulations, the repayment of hybrid instruments recognised as Tier 2 capital is subject to its authorisation. The regulator has not approved the repayment because of the weak level of capital at the bank. The bank estimates a 9M13 pro-forma core Tier 1 ratio of 7.7%, which is below the 8% Basel III Common Equity Tier 1 ratio set by the ECB as the minimum ratio for its asset quality review next year. We believe the non-payment of principal highlights the regulatory risk on junior debt instruments at Italian banks with weaker credit profiles.

The bank's Long-Term IDR (BB/Negative Outlook) is currently at its Support Rating Floor, reflecting potential support from the Italian authorities. The IDR is not immediately sensitive to junior securities' non-performance, but only to that of its senior obligations. The next maturity for hybrid instruments is in 2018, so the risk of another enforced non-payment for this bank is limited in the medium-term.

Carige's low Viability Rating (VR) at 'b-'/Rating Watch Negative is also unaffected by the enforced non-payment as this is initiated by the regulator and does not reflect the bank's inability to repay the instrument, which has a residual value of only EUR9.8m. The VR already reflects significantly deteriorated asset quality and operating performance, and material delays in strengthening its capital.

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