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Moody's revises outlook on Italian banking system to negative

Moody's on Dec. 13 revised its outlook on the Italian banking system to negative from stable, due to concerns about banks' profitability and capital, as well as weakening confidence in the sector stemming from the result of the constitutional reform referendum held Dec. 4.

The rating agency believes that a reduction in the outstanding amount of banks' nonperforming loans will be gradual as lenders have limited resources in the form of excess capital over minimum requirements, while private investors have shown little interest in financing the restructuring of banks. As a result, Moody's expects higher loan loss provisions for the country's banking sector, leading to lower profitability in 2016 and 2017.

Moody's also noted that the recapitalization of Italian lenders will depend on their respective business models and market confidence, which could be negatively affected by higher political uncertainty after voters rejected proposed revisions to the constitution in the referendum that saw Matteo Renzi resign as prime minister. Failure to restructure troubled banks, such as Banca Monte dei Paschi di Siena SpA, could also dent confidence, according to the agency.

However, Moody's expects the Italian banking system's liquidity to remain strong, supported by the ECB's second targeted longer-term refinancing operations and subdued loan demand.