OREANDA-NEWS. Fitch Ratings has downgraded Banca Carige's (Carige) Long-Term Issuer Default Rating (IDR) to 'B- from 'B' and Viability Rating (VR) to 'b-' from 'b'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary.

Carige's IDRs are driven by the bank's stand-alone credit strength as reflected in the VR.

KEY RATING DRIVERS
IDR, VR AND SENIOR DEBT
The downgrade mainly reflects the impact of customer deposit outflows on Carige's funding and liquidity profile, following the resolution of four Italian banks in late 2015 and throughout 1Q16. These outflows revealed that Carige's liquidity profile is prone to sudden changes in creditor sentiment and, in Fitch's opinion, undermined the bank's franchise, including in the retail space.

Customer deposits stopped contracting in April 2016, when the bank recorded a small net growth. To date the bank has implemented effective contingency measures and maintained liquidity ratios above regulatory minimum, but its overall liquidity and funding position has nonetheless deteriorated over the past year. Carige's ratings also reflect weak asset quality, and the consequent impact on its capital, and a loss-making business model.

The recently appointed management faces the challenges of setting new strategic goals for the bank, addressing its weak asset quality, stabilising and strengthening its liquidity and funding profile and restoring the bank's ability to generate sustainable profits.

Carige's asset quality remains weak with impaired loans close to a high 28% of gross loans at end-2015, higher than the industry average. During 2015, inflows of new problem loans decreased more than at some other medium-sized Italian banks, due to a strengthened control environment. Carige's weak asset quality is partly the result of geographical concentration in one region in Italy, Liguria, which enjoys high per-capita wealth but typically lags behind economic recovery.

Despite two share issues in 2014 and 2015, capital remains under pressure from the high level of unreserved impaired loans, which at end-2015 accounted for close to 150% of the bank's Fitch Core Capital (FCC).

SUBORDINATED DEBT
Carige's subordinated debt is rated one notch below the VR in accordance with Fitch's assessment of the instrument's higher loss severity risk profile compared with senior debt. It has thus been downgraded in line with the VR.

SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
The bank's SR and SRF reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

RATING SENSITIVITIES
IDR, VR AND SENIOR DEBT
The bank's ratings are primarily vulnerable to asset quality and capital deterioration, and to further deposit outflows that would put pressure on the bank's already weak liquidity. Recent initiatives aimed at addressing Italian banks' asset quality, if successful, could over time be positive for the bank, and a sizeable reduction of unreserved loans relative to FCC could result in an upgrade.

SUBORDINATED DEBT
Carige's subordinated debt ratings are sensitive to a change in the bank's VR.

SR AND SRF
An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support Carige. While not impossible, this is highly unlikely, in Fitch's view.

The rating actions are as follows:

Long-term IDR downgraded to 'B-' from 'B'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating downgraded to 'b-' from 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured notes (including EMTN): Long-term rating downgraded to 'B-'/'RR4' from 'B'/'RR4', Short-term rating of 'B' affirmed
Subordinated notes: downgraded to 'CCC'/'RR5' from 'B-'/'RR5'