Covered bonds of Banca Popolare di Milano (BPM) were placed on review for possible downgrade by Moody’s yesterday (Monday), after the Bank of Italy found weaknesses during an inspection of the bank.

The rating action is a result of the bank’s senior unsecured rating, A1, having been placed on review for possible downgrade last Thursday (5 May). This in turn followed a recent inspection of BPM by the Italian financial regulator.

Moody’s said that this found corporate governance, organisational, IT, risk management and control weaknesses, and resulted in the bank needing to raise more capital than previously expected. The rating agency felt that these “appear to be more significant than it had already factored into the current ratings”.

Moody’s said that the bank’s long term rating could be downgraded by several notches. It noted that if BPM’s long term senior unsecured rating falls below A3, then the Timely Payment Indicator (TPI) of “probable” could constrain the issuer’s covered bonds to Aa1 or below. They are currently rated Aaa.