Fitch on Italian Banks

Strong Performance in 2024

Jun 14, 2024

A vibrant horizontal image depicting the strength and profitability of Italian banks. Show a modern, sleek Italian bank building with a large Euro symbol and upward graph indicating growth and profitability. In the foreground, happy bank customers, a successful businessperson shaking hands with a banker, and a digital display showing positive financial data. The background should feature iconic Italian elements such as a hint of an ancient Roman building or a scenic Italian cityscape. The overall mood should be positive, professional, and prosperous.

Fitch Ratings, in a recent report, anticipates that the major Italian banks will maintain a robust performance throughout 2024, despite a slight decline in operating profitability compared to the peak levels achieved in 2023.

The profitability is expected to remain well above the long-term average, supported by strong net interest margins and strategic financial management.

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Key Factors Influencing Performance

Net Interest Margins: The banks are expected to sustain net interest margins close to those of 2023, largely due to strong deposit franchises and effective hedging policies. This stability is a significant factor in maintaining profitability amidst a changing economic landscape.

Economic Growth and Loan Demand: While Fitch forecasts modest GDP growth for Italy in 2024, this environment allows for some business and operating income growth. However, the persistent slow economic growth in comparison to other southern European countries and restrictive interest rates are likely to cause a moderate increase in default rates and a subdued loan demand, at least until the second half of 2024.

Record Profitability in 2023: The large Italian banks experienced record profitability in 2023, driven by a return to positive interest rates, moderate pass-through onto deposit rates, and continued low loan defaults, which led to minimal loan impairment charges (LICs). Effective cost control measures helped banks manage the impact of inflation, thereby structurally supporting their cost/income ratios.

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Asset Quality: In 2023, asset quality was better than expected, with the median impaired loans ratio dropping to just under 3%, the lowest in over a decade. Despite a loan contraction, banks have a buffer to handle some deterioration in 2024, with expected LICs ranging between 25 basis points (bp) and 75 bp.

NPL Directive decree approved

Jun 12

The Italian government approved a legislative decree to transpose Directive (EU) 2021/2167, also known as the Secondary Market Directive (SMD). This legislation concerns managers and buyers of impaired loans and amends the previous Directives 2008/48/EC and 2014/17/EU.

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Impact of Sovereign Rating

The sovereign rating of Italy, currently at 'BBB', significantly influences the Issuer Default Ratings (IDRs) of the five major Italian banks, which are all rated either 'BBB' or 'BBB-'. The Stable Outlooks on these banks' IDRs reflect Fitch's assessment that their credit profiles are well-positioned to withstand economic and geopolitical uncertainties, although there is limited potential for near-term rating upgrades.

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Conclusion

The Fitch Ratings report, underscores the resilience and strong performance of major Italian banks amidst a challenging economic environment. While some moderation in performance metrics is expected, the banks' strategic positioning and robust financial management practices ensure they remain well above the long-term performance averages.

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