People Outside the UniCredit SpA Bank Branch in Milan, Italy (Photographer: Alessia Pierdomenico/Bloomberg)

Italian Banks' Outlook Cut by Fitch Amid Political Concerns

(Bloomberg) -- UniCredit SpA and Intesa Sanpaolo SpA were among five Italian banks that Fitch Ratings said could have their credit ratings cut along with that of the state, should the nation’s populist government relax its predecessor’s fiscal discipline.

Mediobanca SpA, Credito Emiliano SpA and Banca Nazionale del Lavoro SpA were also given a negative outlook, down from stable, Fitch said Wednesday as it confirmed the five banks’ long- and short-term ratings for now. Fitch cut its outlook on Italy to negative on Friday.

The decision reflects Fitch’s view that the banks would likely be downgraded if Italy’s rating was cut, given their exposure to the domestic economy and their purchases of government debt. Last week, Fitch said there was an increased chance that Italy’s government will reverse some previous structural reforms, negatively impacting the country’s credit fundamentals. It also said the relatively high degree of political uncertainty compounds the risk.

This summer, investors have turned their attention to Italy’s budget, sending bond yields higher in response to the new government’s expensive electoral promises. Those pledges include hefty tax cuts and some form of universal income for the poor that could have a negative impact on the country’s debt and deficit.

There is a “strong link between sovereigns and banks’ ratings,” Andrea Filtri, an analyst at Mediobanca, wrote in a note Thursday. Still, the Italian government is making “more market-friendly statements of fiscal discipline” of late, Mediobanca’s Filtri said.

While the banks’ shares were little changed, Wednesday, they have underperformed the national stock benchmark this year, with UniCredit and Intesa both down about 15 percent. While UniCredit is more geographically diversified than the other four banks, its risk profile remains highly correlated with that of Italy, Fitch said.

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