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TEXT-Fitch cuts Unione Banche Italiane mortgage covered bonds

(The following statement was released by the rating agency)

Oct 12 - Fitch Ratings has downgraded Unione Banche Italiane's (UBI; 'BBB+'/Negative/'F2') mortgage covered bonds to 'AA-', Negative Outlook from 'AA+'/Rating Watch Negative (RWN) and Banca Monte dei Paschi di Siena's (BMPS; 'BBB'/Stable/'F3') to 'A+', Negative Outlook from 'AA'/RWN. Both programmes have been removed from RWN.

The downgrade concludes Fitch's Discontinuity Cap (D-Cap) assessment based on its updated Covered Bonds Rating Criteria dated 10 September 2012. BMPS' and UBI's covered bonds had been assigned a D-Cap of 2 and their rating had been placed on RWN. Following the placement of the mortgage programmes on RWN, UBI and BMPS confirmed to Fitch that no changes will be made to the programmes to the extent that would allow an improved D-Cap assessment for the Liquidity Gaps and Systemic Risk component.

The D-Cap of 2 is driven by the high risk assessment for the liquidity gap and systemic risk component. This assessment is due to the less predictable wholesale market access that may reduce the likelihood that an Italian financial institution could buy a portion of Italian mortgage loans included in the cover pool in an issuer event of default (see "Fitch Puts 2 Italian Covered Bonds on RWN; Assigns Outlooks & D-Caps" dated September 2012 at ).

For UBI, the 'AA-' covered bonds' rating is based on the bank's Long-term Issuer Default Rating (LT IDR) of 'BBB+', the D-Cap of 2 (high risk) and the asset percentage (AP) that Fitch takes into account in its analysis, which is currently 70.1%.

In terms of sensitivity of the covered bonds' rating, the 'AA-' rating would be vulnerable to downgrade if any of the following occurred: (i) the LT IDR of the issuer was downgraded by one or more notches; or (ii) the D-Cap fell to 1 or 0; or (iii) the programme AP went above 76%, which is the breakeven level in line with the 'AA-' rating. The Negative Outlook on Italy's IDR ('A-'/Negative/'F2') and on the issuer's LT IDR drives the Negative Outlook on the covered bonds.

As the issuer is rated 'F2', the agency relies, for the purpose of its analysis, on highest AP of the last 12 months. This level supports a 'A' rating on a PD basis for the covered bonds.

For BMPS, the 'A+' covered bonds' rating is based on the bank's LT IDR of 'BBB', the D-Cap of 2 (high risk) and the AP of 67.7% that Fitch takes into account in its analysis.

In terms of sensitivity of the covered bonds' rating, the 'A+' rating would be vulnerable to downgrade if any of the following occurred: (i) the LT IDR of the issuer was downgraded by one or more notches; or (ii) the D-Cap fell to 1 or 0; or (iii) the programme AP went above 72%, which is the breakeven level in line with the 'A+' rating. The Negative Outlook on Italy's IDR ('A-'/Negative/'F2') drives the Negative Outlook on the covered bonds.

As the issuer is rated 'F3', Fitch relies, for the purpose of its analysis, on the AP which the issuer publicly commits to. This level of OC supports a 'A-' rating on a PD basis for the covered bonds.

The Fitch breakeven AP for the covered bond ratings will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.

(Caryn Trokie, New York Ratings Unit)

((Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://caryn.trokie.reuters.com@reuters.net))

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