Fitch on Southern European Banks
Economic Slowdown and Rising Rates: Winners and Losers
Fitch Ratings released a new report on Southern European Banks: despite the challenging geopolitical and macro-economic environments and the two-year pandemic crisis, so far there is still no evidence of asset-quality deterioration.
However, downward revisions to GDP forecasts, higher inflation, and supply-chain disruption will lead to higher borrower default rates, but these will be mitigated by further impaired loan disposals, loan loss allowance overlays built during the past two years of the pandemic, and the benefits of the expected rises in interest rates.
Fitch expects Italy’s GDP growth to be more severely affected by the effects of the war in Ukraine and the associated impact on inflation and supply chains, although the Italian economy is now back at pre-pandemic levels and we forecast GDP growth at 2.7% for 2022. As for Spain, NGEU funds should support growth in 2023.
Therefore Italian banks will benefit from the post-pandemic recovery, but high energy prices and lower household confidence will likely reduce loan demand and increase borrower default rates. However, corporates are less leveraged than during the previous crises and savings accumulated in the form of deposits during the pandemic reached about 7% of GDP.
Loan quality deterioration should remain within the rating headroom for most Italian banks, considering that the lowest average impaired loan ratio over the past decade was about 4.5% at end-2021, and our expectation is that impaired loan disposals will continue. We have changed our sector outlook from improving (assigned in December 2021) to neutral.
The 2 largest Italian banks are quite exposed to war in Ucraine
UniCredit S.p.A. is the southern European bank most exposed to Russia, in particular through its local subsidiary, at about 2% of group exposure. The bank booked material provisions in 1Q22 for its local and cross-border exposure to Russian counterparts, accounting for 92bp of its CET1 capital, equivalent to 70% of the losses estimated in an extreme scenario. UniCredit is looking at various disengaging options for its local operations, including a potential sale.
Intesa Sanpaolo S.p.A. (Intesa) is also among the large European banks that have the largest exposure to Russia, although its exposure is smaller than UniCredit’s, at about 1% of loans (credit exposure net of guarantees). In addition, at around a fifth of total primary energy consumption, Italy as a country is more reliant on Russian gas than Spain and Portugal.
Link to the full report
https://www.fitchratings.com/research/banks/what-investors-want-to-know-southern-european-banks-19-07-2022