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Italy’s banking sector: Facts & Figures

The economic recovery in Italy continues, albeit at a more moderate pace than in euro area peers. The GDP grew 0.2% quarter-on-quarter, 0.8% year-on-year in Q1 2017, but is expected to gain momentum in the remainder of the year, up to at least 0.3% quarter-on-quarter. The recent trend in forward-looking indicators (particularly in business confidence indices in the manufacturing sector) is consistent with this view. For the whole year, we are expecting a 1% GDP growth. Risks on this forecast are now on the upside. Growth will be led by industry and by foreign trade, which were a drag at the beginning of the year. Investments should keep the 3% pace, seen last year, while consumption growth is expected to be less vibrant than it was in 2015-16 (below 1%).

The Italian banking system is diversified owing to the varying size of banks. At the end of March 2017, the banking sector comprised 580 banks, including 314 cooperative banks – which are expected to merge quickly into just one or two groups as a consequence of the recent domestic reform in the sector of cooperative banks – 85 branches of foreign banks, 59 standalone banks and 64 credit institutions, the latter being owned by 59 bank holdings. All in all, excluding foreign banks, the Italian banking sector, de facto, comprises less than 120 banks (58 bank holdings, 59 standalone banks, and two or three cooperative bank groups).

The degree of concentration is intermediate among the large European countries. Further concentration is expected mainly involving small and medium-sized banks, driven by corporate governance reforms in the sector of cooperative and mutual banks. The industry’s structure is changing under the impact of both the crisis and the response to technological progress, which have made it necessary to curb operating costs. Between 2008 and 2016 the number of banks fell by 24.4% and the number of branches decreased by 15%.

In 2016, 24 million clients used internet banking (+8.6% compared to 2015) and digital bank transfers accounted for 45% of total bank transfers. Similarly, in 2015 just 16% of cash withdrawals were made in traditional branches. Nevertheless, Italy was behind the euro area in the use of non-cash instruments (80 operations per inhabitants a year versus 202).

Italian banks play a central role in financing the real economy, where SMEs are of outstanding importance, accounting for 80% of persons employed in the business economy, a greater share than in other large EU countries. Consequently, a good part of banks’ borrowers are SMEs, which have little alternative to bank credit as a source of financing. By contrast, in recent years, larger firms have replaced some of their bank lending with bond issues. Despite the rebalancing of financial debt structures towards market sources, by international standards, Italian non-financial corporations still rely heavily on bank loans. In recent years, notwithstanding the significant improvement in credit access conditions, loan demand from businesses has remained subdued and the trend in corporate loans has turned slightly positive since the summer of 2016, following the consolidation of the economic recovery. Thanks to interest rates at all-time low levels and the growth in residential real estate transactions, household mortgages grew by 2.4% year-on-year in March 2017.

Customer funding remains a strength for Italian banks, which recorded robust growth in deposits in recent years. Traditionally, Italian savers have developed a strong preference for safe investments, such as deposits, while in recent years the share of other financial assets such as mutual funds and insurance products has increased. Abundant liquidity and low interest rates justify the ongoing diversification of households’ portfolios, through the switch into assets under management from assets under administration and bank bonds.

Italian banks are facing a delicate transition from a business model of traditional credit intermediation to a more diversified model, with lower exposure to credit risk and reduced capital absorption. The key challenges for the sector are the legacy of non-performing loans (NPLs) and low profitability, which is common to European peers. As a result of the double-dip recession, NPLs reached an amount of €173 billion net of provisions and 9.4% of total loans at end-2016. Clear signs of improvement in credit quality became evident in 2016 when the new NPL rate fell to 2.3%, back to pre-crisis, and the stock of NPLs started to decrease. Moreover, some banks are in the process of selling or securitising large amounts of bad loans. During recent years, profitability has been affected by loan loss provisions and very low interest margins, it then started to improve, thanks to the economic recovery. Income diversification has led to less reliance on net interest income than European peers. Since 2007 banks have improved their capital ratios significantly, with CET1 ratio up from 7% to 12.4% at end-2016.

In terms of economic contribution, the sector employs some 299,600 people, accounting for 1.3% of end-2016 total employment, down from 1.5% in 2009.