OREANDA-NEWS. Italy's large banks face considerable contingency risks because they are continuously being called upon to support the government's efforts to prop up the country's weaker banks and preserve financial stability, says Fitch Ratings.

Intesa Sanpaolo, Unicredit, and other large and medium-sized banks have been encouraged by the Italian authorities to assist in financing a new bank rescue fund. The EUR4bn-EUR6bn fund, 'Atlante', will primarily buy any overhang of shares not taken up by the market from the new equity issues from second-tier banks. These need additional capital to meet European regulatory requirements after posting severe losses in 2015. Atlante will also use some of its resources to buy bank non-performing loans (NPLs) and it may invest in the upcoming government-backed bank NPL securitisation schemes.

Once Atlante is up and running, it will probably take over a portion of Unicredit's impending commitment to underwrite a EUR1.5bn capital increase at Banca Popolare di Vicenza, a troubled second-tier bank. The ability to share its commitment with Atlante is good news for Unicredit but it will drag IntesaSP and a number of other Italian banks into funding an investment which would normally fall outside their risk parameters.

IntesaSP and Unicredit will each inject EUR1bn into Atlante. All Italian banks will also participate in amounts yet to be determined, as will Italian insurance companies, banking foundations and asset management firms. However, banks in need of capital or which have experienced liquidity pressure since the beginning of 2016 are exempt from participating in the fund.

Demands on IntesaSP, Unicredit and UBI Banca, three large Italian banks, have been growing in recent months. Contributions made by them in October 2015 to assist with the resolution of four small Italian banks totalled around EUR900m. This cost IntesaSP and Unicredit around 10%-11% of their pre-tax profits for 2015 and 30% for UBI Banca. The banks also extended liquidity lines to the Italian resolution fund and are required to provide at least EUR100m compensation to retail subordinated debtholders who suffered losses when these securities were written down during the resolution process.

In our view, the financial profiles of the large banks will weaken, and ratings could come under further pressure, if they are called on to continue to provide extraordinary support to the banking sector.

IntesaSP, UniCredit and UBI Banca are rated in the 'BBB' range, indicating good fundamental credit quality, good prospects for ongoing viability and a moderate degree of fundamental financial strength. However, on 24 March we revised the Outlooks on Unicredit's and UBI Banca's ratings to Negative, reflecting asset quality weakness and capital pressures, particularly in view of the high levels of unreserved impaired loans. To a lesser extent, these are also risks for IntesaSP. The Outlook for this bank's rating is Stable but upside potential is limited. Ratings of the three banks could be downgraded if they do not speed up measures to tackle large stockpiles of NPLs and capital remains highly exposed to unreserved NPLs.

The creation of Atlante may face some execution risk. European Commission approval may be required and the proposal that Cassa Depositi e Prestiti, the state-owned investment vehicle, might participate in the fund could face state-aid scrutiny.