Large Italian Banks Thrive in 2024
Significant opportunities for for M&A in a Lower Interest Rate Environment
Large Italian banks demonstrated strong financial performance in 2024, achieving record-high profits despite economic headwinds. A recent Morningstar DBRS commentary states that this robust performance has set the stage for increased merger and acquisition (M&A) activity as banks seek to bolster their competitiveness in an environment of declining interest rates.
Strong Financial Performance in 2024 Leading Italian banks, including Intesa Sanpaolo, UniCredit, Banco BPM, BPER Banca, and Banca Monte dei Paschi di Siena, reported an aggregate net profit of EUR 23.7 billion for FY 2024, marking a 7% year-on-year (YOY) increase. However, Q4 2024 saw a downturn in profits, declining 31% YOY to EUR 4.3 billion, primarily due to lower net interest income (NII), reduced trading income, and higher loan loss provisions (LLPs).
Despite these short-term challenges, the banks maintained an impressive average return on equity of 14.3%, up from 13.7% in 2023. The stability of NII, combined with strong fee income and disciplined cost control, underpinned their operational resilience throughout the year.
Impact of Lower Interest Rates in 2025 With interest rates expected to decline in 2025, banks anticipate some pressure on NII. However, this could be offset by higher loan volumes as borrowing costs ease. Furthermore, Italian banks have secured income from fixed-income securities and rate hedging strategies, which will help mitigate the impact of lower interest rates.
Improved Risk Profiles and Lower LLPs Asset quality remained strong in 2024, reflected in a lower cost of risk (CoR) compared to previous years. LLPs declined YOY, driven by stronger risk management and low default rates. Although Q4 2024 saw a seasonal increase in LLPs, overall provisions were significantly lower than in previous years.
M&A Activity and Competitive Positioning With enhanced risk profiles and sustained capital accumulation, Italian banks are actively pursuing M&A strategies to achieve greater economies of scale and competitiveness within the European banking sector. Strong capitalization, with an average CET1 ratio of 15.8% at the end of 2024, has provided a solid foundation for these strategic moves.
Liquidity and Funding Stability Despite reduced reliance on central bank funding, Italian banks have maintained strong liquidity positions. Customer deposits remained stable, with total deposits 25% higher than pre-pandemic levels. The average liquidity coverage ratio (LCR) stood at 152%, while the net stable funding ratio (NSFR) reached 129%, underscoring the sector's financial stability.
Conclusion The strong financial performance of large Italian banks in 2024 has positioned them well for sustained growth in a lower interest rate environment. While NII may face downward pressure in 2025, the banks' focus on fee-based income, disciplined cost management, and strategic M&A activities will help ensure continued resilience and competitiveness in the evolving financial landscape.
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Relevant Links:
https://dbrs.morningstar.com/research/447926/large-italian-banks-strong-2024-results-are-helping-ma-to-succeed-in-a-lower-interest-rate-environment
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