OREANDA-NEWS. If oil prices do not rise from their current levels, Cassa Depositi e Prestiti's (CDP) profitability will be further undermined, Fitch Ratings says. Dividend income, including payments from Eni SpA, has helped CDP offset falling net interest income (NII) from its traditional intermediation business.

We do not expect Eni's dividend to come under pressure again if oil prices recover in line with our assumptions (USD35/bbl in 2016, USD45 in 2017, USD55 in 2018 and USD65 in the long term). But if this recovery does not materialise, we think oil majors including Eni will look again at dividend pay-outs.

In February, Eni confirmed its FY15 dividend at EUR0.8 per share, down from EUR1.12 the previous year. A payout was maintained despite Eni reporting a EUR8.8bn net loss, largely due to asset impairments caused by lower oil prices. The company's strategic plan released in March proposed maintaining the dividend at EUR0.8 per share in 2016 and said that shareholder remuneration is "sustainable even in a lower-than-expected oil price environment".

Dividends from the four companies in which CDP holds stakes on behalf of the Italian government - Eni, electricity grid operator Terna, natural gas infrastructure company Snam, and credit insurer SACE - have supported CDP's profitability as NII has been squeezed. CDP's overall net income in FY14 was positive due to EUR1.8bn of dividend payments. Eni's lower dividend implies an annual reduction in dividend income for CDP of around EUR300m.

If oil prices stay flat, we think the overall annual dividend pool for CDP could shrink to around EUR1bn over the medium term chiefly due to a fall in Eni's contribution to around EUR0.5bn (Snam, Terna, and SACE are not directly exposed to oil prices). This would add to the pressure on CDP's profitability. NII is highly sensitive to the average rate of interest on Italian public debt.

Interest received on CDP's loans and deposits at the national treasury has fallen faster than that paid on its funding. Fitch estimates that the differential between the average rate of return on nearly EUR350bn of assets/loans and the average cost of funding has fallen from nearly 150 basis points in 2012 to close to zero in 2015. If this spread turned negative, because of the high proportion of deposits whose rate of return is linked to the average return on Italy's bonds, CDP would depend, even more, on dividend income to pay EUR1.6bn annual commission to Poste Italiane for distributing savings deposits via its branch network.

Despite these pressures, CDP's rating ('BBB+'/Stable) will likely remain equalized with the Italian sovereign in the near term. Fitch considers CDP to be credit-linked to Italy in light of its strategic importance to government development policy and the guarantee on retail deposits collected through Poste Italiane, meaning a high probability of extraordinary government support for CDP if needed.

However, our ratings assessment would also focus on whether potential recurrent losses could entail a dilution of support from, or less integration with, the national government, which may warrant a widening of the notching differential with Italy's sovereign. Dilution of support could also stem from rising bond issuance by CDP planned under a government-sponsored EUR160bn plan to support business and infrastructure development. Diversifying from lending to local authorities may ease NII compression, but bond market funding would also increase the proportion of non-guaranteed liabilities, which was 6% in 2014. If these approached one-third of the total, a one-notch differential with the sovereign rating could be introduced