Moody’s cut Banca Popolare di Milano from Baa3 to Ba3 today (Thursday), citing concerns about the bank’s asset quality, earnings pressure and capitalisation. The rating action is expected to lead to a downgrade of the issuer’s OBGs, to the Baa2-Baa3 range.

The rating action concludes a review initiated in November 2012, when BPM’s OBGs were also placed on review for downgrade. Moody’s rates the covered bonds A2. A Timely Payment Indicator of Improbable constrains the OBG rating at this level, Moody’s said in November.

RBS analysts said that the downgrade of BPM will most likely trigger a cut of the covered bonds by three to four notches, to the Baa2-Baa3 level.

Moody’s said that it is concerned about BPM’s deteriorating asset quality, the first driver of the downgrade, and its concentration to the real estate sector. In addition, it said that it expects earnings pressure to persist on the back of significant losses recorded in 2011 and 2012, and that BPM has a modest capital base providing a limited loss-absorption cushion.

The rating agency placed BPM’s rating on review for further downgrade.