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

Fri Dec 6, 2013 6:50am EST

Related Topics

(Repeat for additional subscribers)

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.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.