Italian Banks, Enel Brace for Rating Cut After S&P Downgrade

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September 21, 2011, 11:08 AM EDT By Sonia Sirletti and Alessandra Migliaccio

(Updates shares throughout, quote in the fifth paragraph.)

Sept. 21 (Bloomberg) -- Italian banks including Intesa Sanpaolo SpA and state-controlled companies such as Enel SpA may have their credit ratings lowered by Standard & Poor’s after the company downgraded Italy for the first-time in five years.

Italy’s rating was lowered yesterday by one level on concern that weakening economic growth and a “fragile” government mean the nation will struggle to reduce the euro- region’s second-largest debt burden. Italy was lowered to A from A+ with a negative outlook four months after the company warned the country risked a downgrade.

“At this stage a downgrade on Italian banks is likely,” said Luca Peviani, who oversees about 1 billion euros ($1.4 billion) of assets as managing director of P&G SGR in Rome. “They have a lot of government bonds in their portfolios, which are losing value, weakening their financial positions.”

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries whose credit rating have been cut this year as fallout from the region’s debt crisis prompts scrutiny of rising debt levels. Italian companies whose ratings are linked to the country’s creditworthiness have been suffering in markets as concern over the country’s solvency grows.

“Italy is now facing what its peripheral euro-zone peers are confronted with: the detrimental interaction between sovereign and financial sector risks,” said Nicholas Spiro, head of Spiro Sovereign Strategy, a consulting firm in London.

S&P lowered its outlook on Intesa, Mediobanca SpA, and two other banks to negative in May, four days after putting Italy’s sovereign rating on review, because of “their predominantly domestic business profiles.”

Bond Holdings

Intesa, Italy’s second-largest lender, held 64.5 billion euros of government bonds as of June 30. UniCredit SpA, the largest bank, owned 38.7 billion euros of bonds. Monte Paschi di Siena SpA, the third-largest, holds about 25 billion euros.

“One of the possible transmission mechanisms to banks could have to do with valuation changes on banks’ government bond holdings,” S&P Managing Director of European Sovereign Ratings Moritz Kraemer said in a conference call yesterday. A rating cut of the banks wouldn’t be automatic, he said.

UniCredit has declined 56 percent this year, with Intesa shedding 49 percent of its value, more than the 30 percent decline in Italy’s benchmark FTSE MIB index.

“We might expect that Italy’s rating downgrade could trigger a downgrade of Intesa’s credit rating, as the bank would now have a higher rating, A+, vs. Italy,” analysts at CA Cheuvreux wrote in a note yesterday.

Giuseppe Mussari, head of Italy’s banking association, said yesterday that S&P had affirmed ratings on many Italian banks in recent weeks and he “doesn’t see why they should be changed now.”

Enel’s Rating

On May 25, S&P changed its outlook to negative for Enel, the biggest electricity company, citing slowing economic growth and “diminished” prospects for reducing government debt. The state still controls 31 percent of the former monopoly.

“I think it’s likely that the downgrade will soon hit Italian state-controlled companies given their reliance on government support,” said Angelo Drusiani, who manages about 3 billion euros at Banca Albertini Syz & C. in Milan. “Enel has a large debt and a downgrade would make it more difficult to finance itself.”

Enel, which became Europe’s most-indebted power producer after the purchase of Spain’s Endesa SA in 2007, has cut costs and sold assets to improve its finances. The company reported a net debt of 46.1 billion euros at the end of the second quarter and aims to cut that to 36.5 billion euros by 2015.

S&P said in May that a further debt reduction could lead the company return Enel’s outlook to stable.

--With assistance from Francesca Cinelli in Milan. Editors: Andrew Davis, Jeffrey Donovan

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net; Alessandra Migliaccio in Rome at amigliaccio@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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