Moody’s cut the rating of mortgage covered bonds issued by Banca delle Marche from A3 to Ba2 on Saturday, as a result of a multi-notch downgrade of the issuer that the rating agency said was caused by the Italian bank’s deteriorating ability to generate capital and access the capital markets.

Moody’s downgraded Banca delle Marche from Ba1 to B3 on Friday. This impacted the Timely Payment Indicator analysis and the expected loss analysis of the issuer’s covered bond programme, said the rating agency. Banca delle Marche’s obbligazioni bancarie garantite have a Timely Payment Indicator of “improbable”, which in combination with the new issuer rating of B3 limits the programme’s rating to Ba2.

Moody’s estimated cover pool losses for the programme are 26.5%, split between market risk of 21.5% and collateral risk of 5%, the latter deriving from a collateral score of 7.5%.

The rating agency said that Banca delle Marche was downgraded by five notches to B3 as a result of the bank’s deteriorating standalone financial strength resulting from weak capital generation capacity, declining asset quality, high reliance on European Central Bank funding, and limited access to the capital markets.

Moody’s noted that the bank’s problem loans reached 141% in June against a 52% system average at the end of 2011. Banca delle Marche’s coverage for non-performing loans also declined from 39% in 2007 to 28% in June, and the bank retains high loans concentrations and exposures to the real-estate sector, according to the rating agency.

Moody’s said that it expects the bank to increase coverage of problem loans and to apply stricter problem loan classification. This will cause the bank’s Tier 1 capital ratio of 8.36% to decline further, and this will provide an insufficient cushion against further asset quality deterioration under the rating agency’s adverse scenario.

Moody’s also said that Banca delle Marche is mainly retail funded and it is highly reliant on ECB support, as 60% of its funding comes from the European Central Bank.

“Moody’s believes that there is a risk that market access will continue to be restricted and costly for an extended period,” said the rating agency.

“As a result, an additional negative rating driver is the uncertainty regarding when the bank will again be able to fund itself regularly, and on an economic basis, in the markets.”