Moody’s cut Italy’s Banca Carige from Baa3 to Ba2 on Friday and analysts expect the issuer’s covered bonds to be downgraded from A2 to Baa1 or Baa2 and haircuts for repo with the ECB to increase.

The rating action on the issuer was prompted by Moody’s concerns over the bank’s weak loss-absorption capacity, pressure on asset quality and high credit costs, weak earnings, and funding challenges.

On funding challenges, Moody’s noted that the bank has become more dependent on ECB funding and that central bank funding maturities are concentrated in 2015, although the bank has a favourable retail funding profile.

“Moody’s recognises the bank’s satisfactory liquidity position, but will closely examine during its review the bank’s funding flexibility and its capacity to fund itself regularly on an economic basis,” it said.

The new, Ba2 rating was placed on review for downgrade alongside Carige’s standalone bank financial strength rating (D) and baseline credit assessment (ba2).

Covered bond analysts said that they expect Banca Carige’s obbligazioni bancarie garantite to be cut to Baa1-Baa2 as a result of the issuer downgrade, which would increase the repo haircut applied by the ECB given that Moody’s had rated the covered bond the highest and its rating of the OBGs is set to fall below single-A minus. One analyst also noted that Carige will have to appoint a back-up servicer as a result of being downgraded.