Moody’s downgraded Italy’s Banca Carige from B2 to B3 and placed the rating on negative outlook yesterday (Wednesday), citing further deterioration of the bank’s asset quality and profitability, and challenges facing its capital raising plans.

The rating action concludes a review for downgrade.

“The key driver of today’s rating action has been Banca Carige’s continued deterioration of asset quality and profitability, which now compares more weakly than the average of the Italian banking system,” said the rating agency.

It believes that asset quality and profitability indicators emerging after a review by the Bank of Italy are a more accurate reflection of the bank’s position in this regard than “the previously shown apparent resilience and profit stability”.

Moody’s considers that the asset quality and profitability challenges are exacerbated by increased uncertainty surrounding the bank’s plans to strengthen its capital.

It noted growing challenges facing Carige’s plan to increase its capital by Eu800m by the end of March 2014, mainly via the sale of non-core assets, with any remaining amount covered by a secondary capital offering.

In addition, there is uncertainty about the capital levels that Carige will report at the end of 2013

“Following substantial loan book clean-ups requested by the Bank of Italy in 4Q 2012, 1Q, 2Q, and 3Q 2013, further extraordinary provisioning may still be booked in 4Q 2013,” said Moody’s, “as indicated by Banca Carige’s lower-than-average coverage of problem loans.”