DBRS on March 24 downgraded Veneto Banca SpA's issuer rating and senior long-term debt and deposits rating to B (high) from BB (low) and placed them under review with negative implications.
The agency also lowered Veneto Banca's intrinsic assessment to B (high) from BB (low) and placed its R-4 short-term debt and deposits rating under review with negative implications.
The rating agency also placed Banca Popolare di Vicenza SpA's B (high) issuer rating and senior long-term debt and deposit rating and R-4 short-term debt and deposit rating under review with negative implications.
The actions reflect uncertainty over the Italian banks' capital position in light of their recent request for "temporary and extraordinary" financial support from the Italian government in preparation for their planned merger.
Both lenders' capital positions are weak because of their high stocks of bad loans, DBRS noted, adding that any large-scale sales of bad loans would generate a "large capital shortfall" in both banks' case.
Litigation costs could also pose problems to the banks' capital position, the rating agency added. However, the banks have tried to address this by offering shareholders compensation for losses incurred on their investments over the past decade in return for waiving their right to legal recourse.