Fitch yesterday (Tuesday) downgraded Banca Carige and Banca Popolare di Milano and affirmed the ratings of Credito Emiliano as part of rating actions on nine Italian banking groups following a periodic review.

Banca Carige was cut from BBB to BB+, Banca Popolare di Milano (BPM) from BBB to BBB-, and Credito Emiliano was affirmed at BBB+. All the banks’ long term issuer default ratings (IDRs) are on negative outlook, which Fitch said reflects the pressure arising from prevailing challenges in the operating environment, where access to wholesale funding has become more difficult and pressure on profitability remains high.

The rating agency said that the Viability Ratings (VRs) and therefore the issuer default ratings (IDRs) of all the banks would come under pressure if operating profitability deteriorated further or if the inflow of new impaired loans materially rose for a prolonged period of time. The banks’ ratings are also sensitive to material deterioration in funding and liquidity, it said, noting that the liquidity of the nine banking groups has come under pressure as funding conditions have deteriorated materially since the second half of 2011.

Fitch said that it cut Banca Carige’s and BPM’s issuer default ratings and Viability Ratings because it expects the banks’ performance and asset quality to remain under pressure in the prevailing operating environment.

Credito Emiliano’s VR and IDRs were affirmed because Fitch expects the bank’s operations to remain more resilient than most of its peers’ during the prevailing economic downturn. It said that it considers the bank’s operating profitability, asset quality and capitalisation to be adequate.

A covered bond analyst said that BPM’s and Banca Carige’s covered bond ratings can be maintained at their prevailing levels (A, on Rating Watch Negative; and A-, respectively) despite the lower senior unsecured ratings, but that strong rating pressure remains.

“While we have limited fundamental concerns regarding Italian residential mortgage pools,” he said, “for investors with rating limits, the current environment seems to provide a good opportunity to reduce exposure.”