Moody’s cut seven Italian covered bond programmes today (Thursday), and kept or placed four on review for downgrade, after downgrading the respective issuers’ ratings. UniCredit Bank AG and UniCredit Bank Austria have also been downgraded, from A1 to A2.

Mortgage covered bonds issued by Banca Carige, Banca delle Marche, Cassa di Depositi, and Intesa Sanpaolo were downgraded from Aaa to Aa1, while mortgage covered bonds issued by Banco Popolare Societa Cooperativa fell further, from Aaa to Aa2.

Public sector programmes from Cassa di Depositi and Intesa Sanpaolo were cut from Aaa to Aa1.

Moody’s lowered the Timely Payment Indicators of public sector covered bonds to “improbable”.

A downgrade of the sovereign’s rating from Aa2 to A2 on Tuesday ultimately led to this downgrade of the covered bonds, said Moody’s, because in its rating methodology Italian covered bonds may not exceed the sovereign debt rating by more than a set number of notches.

“For the affected programmes, Moody’s may assume higher stress scenarios when modelling the collateral backing the covered bonds,” said Moody’s, “to account for losses in the event of a sovereign default.”

Moody’s added that issuers could possibly offset any worsening in the expected loss analysis by adding further collateral, or otherwise restructuring their programmes.

Due to the large amounts of additional “committed” collateral that are consistent with current rating levels, Moody’s has maintained the review for downgrade on public sector covered bonds from Cassa di Depositi and Intesa SanPaolo.

Moody’s also put on review for downgrade Aaa-rated mortgage covered bonds issued by Credito Emiliano, Unione di Banche Italiane and UniCredit SpA. The rating agency noted that mortgage covered bonds issued by Banco Popolare di Milano remained on review for downgrade because the issuer’s long term senior unsecured ratings remain on review. It noted “if this rating is downgraded below A3, the TPI framework would constrain the covered bond ratings below Aaa.”

The rating agency said that while reviewing the programmes on review for downgrade it would “assess the willingness of the issuers to further strengthen their programmes by adding more collateral to support the rating assigned to the covered bonds”.

Moody’s downgraded UniCredit SpA from Aa3 to A2 yesterday, on negative outlook. The rating agency said this was driven by the lower standalone rating of UniCredit, downgrade from C to C-, and the downgrade of the Italian government bond rating from Aa2 to A2, “indicating a lower ability of the Italian government to provide systemic support in case of need”.

Failure to strengthen the group’s profitability or a renewed deterioration in asset quality could put negative pressure on the BFSR, said Moody’s, and a downgrade of the BFSR would likely lead to a downgrade of the long term deposit and debt ratings.

Moody’s downgrades of UniCredit Bank Austria and Germany’s UniCredit Bank AG, both from A1 to A2 on negative outlook, were partially driven by the downgrade from C to C- of the standalone bank financial strength rating (BFSR) of parent bank UniCredit SpA.

Public sector covered bonds issued by UniCredit Bank AG and UniCredit Bank Austria are rated Aaa and have a TPI leeway of three notches and a timely payment indicator of “high”, while mortgage covered bonds issued by UniCredit Bank AG are rated Aa1 and have a Timely Payment Indicator (TPI) of “probable-high” and a TPI leeway of three notches.

UniCredit Bank Austria’s negative outlook reflects possible transition risk in the standalone financial strength of its parent bank, UniCredit SpA, said UniCredit, according to Moody’s.

The rating agency said UniCredit Bank Austria’s rating incorporated one notch of rating uplift for parental support compared with two notches previously, and retained a two notch rating uplift for systemic support.

Moody’s expected a high probability of support from the Austrian government, in case of need.

However, it added the issuer could be further downgraded as a result of a downgrade of its own BFSR and/or continuing weakening of the standalone financial strength profile of UniCredit SpA. Should systemic support weaken further, Moody’s might further downgrade the bank’s rating.

But Moody’s noted it does not currently foresee upward pressure on the bank’s debt and deposit ratings, “partly due to the high systemic support assumptions already factored into its long term ratings”.

The downgrade of UniCredit Bank AG was due to a readjustment of Moody’s systemic support assessment, following the introduction of a resolution regime in Germany, as well as a result of the rating action on its parent institution.

Moody’s said a weakening support in Germany, implied a lower probability that the bank would receive support from the German government, in case of need. It said this had resulted in a reduction of rating uplift for systemic support, from three to two.

UniCredit Bank AG no longer benefits from ratings uplift from parental support, but still incorporates two notches of systemic support. The rating agency said it continues to believe that the likelihood of support from the parent bank remains high, but these support assumptions no longer result in any uplift from UniCredit Bank Ag’s Baa1 standalone credit strength.

Moody’s said the downgrade of UniCredit SpA’s BFSR “mirrors various pressures the group faces in the Italian home market, and implies a weaker capacity of the parent bank to support its international subsidiaries.”