Italian Banks' Sovereign Exposures
A DBRS commentary analizes potential risks from sovereign exposures of 8 Italian
DBRS Published a commentary that analyses the sovereign exposures of 8 Italian banking groups, and the potential risks to these banks resulting from these exposures.
Sovereign Yields in Southern Europe have Risen Significantly with Implications for Banks Higher inflation and the expectation of a tighter ECB monetary policy has resulted in European sovereign bond yields rising since the start of 2022. This has been most noticeable in southern European countries such as Greece, Italy, Portugal and Spain .
DBRS Morningstar views Italian banks’ sovereign exposures as manageable despite current market volatility, as the banks have reduced their exposures over recent years to more moderate levels. In addition, in response to tensions surrounding the Italian sovereign in 2018, banks have reduced their exposures to bonds classified as Hold to Collect and Sale (HTCS), shifting towards assets categorised as financial assets at amortised cost (HTC).
This has helped offset the negative impact on the fair value reserves of the total portfolio and reduce the sensitivity of Italian banks’ capital base to market risk. Although slightly reduced from past years, Italian banks still have meaningful exposures to sovereign risks. Including debt securities and loans, these exposures amounted to EUR 366 billion, or 16% of total assets on average, at end-2021 (Exhibit 1) compared to 18% at end-2017. Whilst domestic exposures account for the largest part (7.8% of total assets), Italian banks also hold significant amounts of Spanish, French and German sovereign exposures.
DBRS notes that while yield increases have been more notable in Southern European government bonds, persistent worldwide inflation concerns have also led to yield increases in excess of 150 bps in “safe-haven” instruments such as the US and German 10 Year bonds.
Higher inflation and the expectation of a tighter ECB monetary policy has resulted in European sovereign bond yields rising since the start of 2022. This has been most noticeable in southern European countries such as Greece, Italy, Portugal and Spain. DBRS Morningstar views Italian banks’ sovereign exposures as manageable despite current market volatility, as the banks have reduced their exposures over recent years to more moderate levels and have the majority of them at amortised cost, which hedges capital ratios against volatility in bond prices. said Arnaud Journois, Vice President from the DBRS Morningstar Global Financial Institutions team.
Reference.
https://www.dbrsmorningstar.com/research/398992