Moody’s placed on review for downgrade Banco Popolare’s Baa3 rating yesterday (Tuesday) because of concerns about deteriorating asset quality and the bank’s ability to generate capital against the background of recession in Italy.

The rating agency noted that Banco Popolare reported a “very high” number of problem loans, which increased from 14% of total loans at the end of last year to 16% in September, reaching a level significantly above the banking system’s average, and amounting to 113% of the issuer’s equity and loan-loss reserves. Concerns on problem loans are exacerbated by the high exposure of the bank to the real estate sector, said Moody’s.

Moody’s said that Banco Popolare’s EBA-compliant Tier 1 ratio of 9.8% is significantly above the minimum required by supervisors, but noted a decrease in Banco Popolare’s risk weighted assets, from Eu90bn at the end of 2011 to Eu58bn in the third quarter, which it said was mainly a result of the adoption of the internal risk-based (IRB) approach for the computation of exposures.

“During the review Moody’s will analyse the individual components of this regulatory capital evolution to fully assess the bank’s loss absorption capacity,” said the rating agency.

Regarding profitability and internal capital generation, Moody’s noted a “lacklustre” performance of the bank in the last six months. Banco Popolare reported losses of Eu54m in the nine months to September, in comparison with Eu356m of net profit in December 2011.

“The combination of Banco Popolare’s weak internal capital generation and poor asset quality has raised the barriers for Banco Popolare to access the capital markets, increasing Banco Popolare’s dependence on the European Central Bank for funding (at Eu13.5bn as of November or 9.9% of assets as of September 2012, which is significant),” said Moody’s.

Banco Popolare’s covered bonds are rated A2, with a Timely Payment Indicator of “improbable” and no TPI leeway.