DBRS: Stable Outlook on Italian Banks
Higher NII, Cost Control And Lower Credit Costs Support Q1 2023
DBRS analyzed in a recent commentary analyses the Q1 2023 results for the five major Italian banks: Intesa Sanpaolo, UniCredit, Banco BPM, BPER, and Banca MPS.
Large Italian banks (Intesa Sanpaolo, UniCredit, Banco BPM, BPER, and Banca MPS) reported an aggregate net profit of EUR 4.8 billion in Q1 2023 (Exhibit 1), around three times higher than in Q1 2022, or up 51% Year-on-Year (YOY) excluding provisions for Russia in Q1 2022. Results in Q1 2023 benefitted from higher revenues, cost control, and lower credit costs.
Higher net interest income (NII), resilient fee income and cost control supported operating profits in Q1 2023. After recent strong increases, we expect NII to gradually stabilise in coming quarters, reflecting our view that the pressure on funding costs will likely increase and new loan originations will slow due to higher interest rates and tightening in credit standards. Nonetheless, the outlook for NII in 2023 remains stable in our view.
Loan Loss Provisions (LLPs) were down YOY in Q1 2023. However, LLPs increased YOY excluding Russia, reflecting higher concerns around future asset quality dynamics. The average cost of risk in Q1 2023 was below the levels reported in 2019-2022, however banks are guiding for a slight increase in 2023 to a level still lower than in recent past. In our view, the higher operating profits built on NII growth will allow banks with higher flexibility to accumulate higher reserves. Asset quality remained sound in Q1 2023, although it is now showing the first signs of pressure.
Capital buffers were robust and able to absorb the theoretical, albeit unlikely, impact from unrealised losses carried by the securities at amortised cost. The ample, granular and mostly insured deposits support the sector's liquidity despite some deposit outflows and TLTRO III repayments. We expect most of the residual TLTRO to be repaid from existing liquidity, however some banks may need to tap markets or central banks, thus incurring higher costs due to higher interest rates.
“Q1 2023 results benefitted from higher revenues, cost control, and lower credit costs” said Andrea Costanzo, Vice President from the DBRS Morningstar Global Financial Institutions team. “After recent strong increases, we expect NII to gradually stabilise in coming quarters, reflecting our view that the pressure on funding costs will likely increase and new loan originations will slow due to higher interest rates and tightening in credit standards. In our view, the higher operating profits built on NII increases will enable banks with higher flexibility to accumulate higher reserves.”
Link to the report:
https://www.dbrsmorningstar.com/research/413903
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