Moody’s has downgraded UBI Banca from A1 to A2, on negative outlook, because of the Italian bank’s “very weak ability to generate capital internally”, compounded by weak efficiency and asset quality.

The rating agency cut the bank’s rating on Thursday, also downgrading its standalone bank financial strength rating (BFSR) from C to C-.

The outlook on the standalone rating was revised from negative to stable, while the negative outlook on the long term deposit and debt ratings are on negative outlook to reflect Moody’s ongoing reassessment of the support framework in Italy.

The downgrade of the debt rating was driven by the rating action on the BFSR, said Moody’s.

The rating agency noted concerns about the bank’s ability to generate capital internally, but said that it expects the weakening of UBI Banca’s performance to be bottoming out and also took into account the positive impact on the bank’s credit profile of a Eu1bn capital raising carried out in July.

Moody’s rates covered bonds issued by UBI Banca Aaa, with a Timely Payment Indicator (TPI) of “probable”. This means that the covered bonds can continue to be rated Aaa as long as the issuer is rated A3 or higher, according to the linkage between TPIs and issuer ratings under Moody’s covered bond rating methodology.