Scope on Italian Banks
Benign operating conditions support performance
Scope Ratings Italian Bank Quarterly report stated that 2024 looks favorable for Italian banks with better-than-expected operating conditions, while latent risks persist, as evidenced by developments around eco-tax credits.
Italian banks have started the year robustly, continuing to generate substantial profits despite the peak in net interest income has passed. Revenues increased in the first quarter, driven by a significant rebound in fee and commission income. Expense growth was kept in check, and the cost of risk hit a new low of 33 basis points, reflecting solid loan performance.
The return on equity for Italian banks was 14.5% in the first quarter. While we do not expect banks to match their 2023 results, there could be potential upside from slower deposit repricing, delays in ECB rate cuts, and less severe deterioration in credit quality.
The government's amendment of the Superbonus decree has alleviated fears of a full retroactive extension of the maturity of tax credits related to eco-bonuses. However, the risk of political intervention remains high, and banks' exposure to these tax credits is significant in some cases.
Early Signs of Credit Deterioration but Default Rates Remain Below Expectations
Italian banks' asset quality remains robust despite early signs of credit deterioration and the adverse impact of reduced loan volumes. The average gross non-performing exposures (NPE) ratio was stable for most banks, with only a slight increase of 10 basis points on average.
Most banks saw a quarterly rise in NPEs, with BPER experiencing the highest growth at 6.3%, reflecting normal flows. Banco BPM was an exception due to asset disposals in Q1. BPSO was the only bank to explicitly mention stress signs, particularly among retail customers, but its annualized default rate remains very low at 1.1%. UniCredit's quarterly default rate was 1.3%, affected by two specific cases, though the underlying level was below 1%.
Scope continues to anticipate a gradual decline in asset quality as higher interest payments begin to impact the most vulnerable borrowers. However, banks are well-prepared for this, having budgeted for higher default rates compared to 2023. They project a stable annual cost of risk, thanks to pre-emptive provisioning and high coverage levels.
Banks' CET1 ratios rose to 15.3% in Q1. Some lenders now hold substantial capital surpluses that could be used to strengthen their market positions, including through mergers and acquisitions (M&A). However, current market prices have made bargain acquisitions unfeasible, and supervisors are advocating for capital build-up.
Outstanding TLTRO III lines have been reduced to EUR 62 billion, 12% of the maximum drawdown. Meanwhile, bond issuance activity has been strong as banks boost their Minimum Requirement for Own Funds and Eligible Liabilities (MREL) capacity.
Entering Italian NPE Market is a newsletter and a Linkedin Group focused on News, Updates and Insights on Italian Banks, Ditressed Credit Market, Fintech and Real Estate.
Relevant Links:
https://www.scoperatings.com/ratings-and-research/research/EN/177023
This newsletter is free please consider supporting it with a small donation
See my full professional profile (available for consulting projects)
My Podcast on Financial News and Education
My new Podcast on Italian Politics