Fitch on Italian Banks
Liquidity and Funding Resilient due to Stable Deposits
According to Fitch Rating the liquidity of Italy’s five largest banks should remain sound amid the current volatile market conditions due to funding structures dominated by customer deposits that have a record of stability through economic cycles
Intesa Sanpaolo, Unicredit, Banco BPM, Gruppo Bancario Cooperativo Iccrea and BPER Banca operate as universal banks and have similar funding structures, with customer deposits accounting for between 60% and 72% of total funding. Access to wholesale funding markets across various geographies and debt instruments varies among the five banks, with Intesa and Unicredit the most active, including in periods of market volatility.
The banks’ median loans-to-customer deposits ratio was 89% at end-September 2022, well below the four-year average, reflecting a faster increase in deposits than loans in recent years. Deposit growth started to slow in 1H22 and we expect this trend to gather pace in 2023. Some of this deposit base may be eroded by high inflation and increased interest rates eroding disposable income, grace periods on pandemic-related loans coming to an end and competition from alternative investment options. However, we do not expect this to fundamentally weaken the banks’ funding profiles as credit demand is also likely to decrease, given the economic slowdown.
All five banks issued debt, mainly senior preferred bonds, in late 2022 and early 2023, and we expect investor appetite for the banks to be resilient, despite the economic slowdown. Issuance costs have inevitably increased, however, due to higher interest rates.
The banks had about EUR312 billion of targeted longer-term refinancing operations (TLTRO) funding outstanding at end-September 2022, most of which is due in 2023. Over a quarter of this TLTRO funding was repaid by end-2022 and the residual maturities, although still large, are mostly covered by excess liquidity deposited at the central bank. We expect Iccrea, which has relatively little deposited at the central bank, to fund its repayments mainly through a reduction in its securities portfolio, for which maturities are largely matched with the TLTRO facility.
The banks have been able to limit pass-through rates on deposits, so far, reflecting their strong pricing power. Intesa and Unicredit have said that their deposit beta could increase to 30%-40% in 2023, but the higher funding costs should not materially affect profitability, as higher interest rates will also boost revenue, particularly as a large portion of lending in Italy is floating rate.
Fitch expects Italy’s economy to slow down in 2023 compared to 2022, with high inflation and rising interest rates leading to lower credit demand and modestly higher borrower default rates. We expect loan impairment charges to increase in 2023, weighing moderately on profits. However, impaired loans ratios are the lowest in over a decade and the five banks have largely completed their de-risking. The banks’ aggregate stock of impaired loans more than halved over 2020-2022, while the median impaired loans ratio decreased to 3.9% at end-2022 from 9.8% at end-2019. Meanwhile, loan loss provisions strengthened, with the median coverage ratio increasing to over 85% from 60%.
The banks have comfortable capitalisation to absorb potential asset-quality deterioration while pursuing capital distributions in line with their plans. The banks had a median common equity Tier 1 (CET1) ratio of 14.3% at end-2022, similar to the median of the 20 largest Fitch-rated European banks. Encumbrance by unreserved impaired loans has decreased materially since 2017 and, for most of the banks, is now in line with international standards. The banks still have high exposure to Italian sovereign debt (BBB/Stable), in some cases much larger than their CET1 capital. Unrealised valuation losses on securities accounted for at amortised cost (largely Italian sovereign debt) are modest relative to the banks’ CET1 capital.
Link to the report:
https://www.fitchratings.com/research/banks/large-italian-banks-liquidity-funding-resilient-due-to-stable-deposits-13-04-2023
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