Dagong has published a commentary on Italian Banking Sector.
Focus on asset quality: Asset quality has been the key challenge for Italian banks, due to a very large stock of non-performing loans (NPL) of EUR 324Bn as of 2Q17, that has not been managed as proactively as it has been the case in other EU countries (e.g. Spain and Ireland). A more active approach has been implemented only from the second half of 2016, mostly following the publication of the ‘Guidance to banks on non-performing loans’ by the ECB.
Larger sales of NPL expected for 2018: Italian banks are materialising larger sales and write-downs of NPL. We expect that NPL will reach a level closer to 15.5% of all loans, with a coverage ratio above 55% by YE18, following the more aggressive initiatives to sell deteriorated loans and to manage the portfolios more actively compared to what has been done in previous years.
Persistently low interest rate environment: We expect that for 2018 the still low interest rate environment will keep profitability close to the levels of YE17. In addition, Italian banks with heavy operational structures are struggling to significantly reduce costs to offset the reduction of net interest income coming from the low level of interest rates.
Efforts to consolidate the industry and improve efficiency: The structural weakness inherited from the very fragmented nature of the Italian banking system (around 400 consolidated banking groups by the end of 2016) has been the driver of a very low efficiency. Larger players (e.g. Banca Monte dei Paschi (NR) and Unicredit (NR)) are implementing aggressive plans to modernise their operating structures and improve efficiency going forward.
Capital has been strengthened in 2017: We expect further improvements in capital, following the need to build up MREL. Italian banks will continue to build up capital levels to be more aligned with European competitors, following also the trend on CET 1 increases promoted by the regulators.
Capitalisation ratios to be affected by IFRS 9: Based on calculations disclosed by the Bank of Italy, the introduction of IFRS 9 will have an estimated negative effect of 38bps on the average CET 1 of Italian banks, with a more moderate effect for significant banks than for less significant banks (37 and 47 bps, respectively).
The whole research is available to read at www.dagongeurope.com.