Standard & Poor’s downgraded nine Italian covered bond issuers on Friday as part of a rating action on 34 Italian banks, after downgrading the sovereign from A to BBB+ on 13 January, and a review of Italy’s banking industry country risk assessment (BICRA).

In Italy, S&P only rates covered bonds issued by UniCredit (AA+) and Mediobanca (A), so the impact on Italian covered bonds is limited, said Bernd Volk, head of covered bond research at Deutsche Bank. He added that Mediobanca’s covered bonds are retained, but that while UniCredit covered bonds will not necessarily be downgraded further at this stage – with a six notch maximum uplift from the issuer’s rating available under S&P’s methodology – downgrade risk remains.

S&P revised Italy’s BICRA from group 3 to group 4. In a separate report, the rating agency explained that the BICRA reflected its view that Italy’s vulnerability to external financing risks has increased given its high absolute amount of external public debt, which results in adverse spill-over effects on Italian banks, in particular their ability to roll over wholesale debt.

S&P anticipates persistently weak profitability for Italian banks in the next few years, and a risk adjusted return on core banking products that may not be sufficient for banks to meet their cost of capital. The rating agency believes this may be negative for the Italian banking industry’s stability.

Two Italian banks were affirmed while one was kept on CreditWatch with negative implications.

The rating actions include covered bond issuers:

• UniCredit, from A to BBB+
• Intesa Sanpaolo, from A to BBB+
• Banca Monte dei Paschi di Siena, from BBB+ to BBB
• Banco Popolare Societa Cooperativa, from BBB to BBB-
• Unione di Banche Italiane, from A- to BBB+
• Mediobanca, from A to BBB+
• Banca Popolare di Milano, from BBB to BBB-
• Banca Carige, from BBB to BBB-
• Credito Emiliano, from BBB+ to BBB