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Italy’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

After growing by 1.6 percent in 2017, the fastest in nearly a decade, economic growth in Italy slowed in 2018 at 0.9%. The latest indicators point to a slight recovery in Italian economic activity in the first quarter of 2019, with respect to the previous quarter, interrupting the marginally negative trend of the second half of 2018. Despite the recent financial turbulence, employment and labour force participation have risen, unemployment has fallen, and banks’ non-performing loans (NPLs) have declined. Growth is projected at around 0.8% in 2019 and beyond.

The banking sector is among the primary strong points of the Italian economy. Ten years on, much has changed: credit risk is decreasing, capitalisation is rising, restructuring and consolidation are going on, and profitability is recovering.

The health of Italian banks is also reflected in the fundamental role they continue to play in favour of households and firms. Lending to the private sector has been expanding since the end of 2016. Latest figures, as of April 2019, show that total loans to households and non-financial firms continue to grow, increasing by around 0.9% on an annual basis.

Loans to households continued to increase at a robust pace, with an annual growth rate close to 2.6%, driven by loans for house purchase due to the favourable conditions in the real estate market, which is supported by the improvement in the Italian consumer confidence index, low interest rates and lower house prices.

Customer funding remains a strength for Italian banks. In particular, deposits continue to increase, at an annual growth rate of approximately 3.9%, while the reduction in retail bonds continues.

Asset quality is also improving, both in terms of flows and stock of NPLs. The flow of new NPLs, which has been decreasing since 2014, stands at about 1.4% of total loans, below the pre-crisis average.

The stock of NPLs continued to fall at a swift pace, due in part to the massive disposals of NPLs that totalled €55 billion last year, €15 billion more than the amount the sector had set out to sell at the start of 2018. The volume of total net NPLs (which means taking into account the losses on NPLs already accounted for in the banks’ balance sheet) amounted to €90 billion. The reduction of the NPLs inflows combined with the increasing outflows have allowed a strong reduction in the NPL ratio, from 16.2% in 2015 to 8.7% in December 2018 if measured in gross terms, or from almost 10% to 4.3% in net terms. This declining trend is expected to continue in the years ahead.

The coverage ratio for NPLs grew from 50.4% in December 2016 to 52.7% at the end of 2018.

Capital adequacy has also increased and is well above the prudential minimum target. Common equity tier 1 ratio of the whole banking sector stood at around 13.3% at year-end 2018 (12.7% for Significant Banks and 16.5% for Less Significant Banks), up from 7.1% in 2007.

The profitability of the Italian banks, even if still lower than the cost of capital, as for the majority of the other European banks, is improving. In 2018 the return of equity (ROE), net of extraordinary components, rose to about 6% from 4.1% in 2017. The overall improvement is mostly due to fewer loan loss provisions (about one-third less), and the 3.9% reduction in operating costs.

The restructuring and the consolidation of the Italian banking sector continue, partly induced by the changing regulatory environment and the digital revolution. This is confirmed by the reduction in the number of banks (the current number of bankplayers, comprising bank holding groups and independent banks in Italy stands at 113), the fall in the number of branches, which decreased by 28% between 2008 and 2018 and the increasing relyance on digital resources.

With respect to the latter, the digitalisation of banking customers has shown a strong acceleration in the last five years. According to a survey carried out by ABI, the use of web banking grew to 56% in 2018 compared with 43% in 2012).

Italian banks and financial intermediaries are also developing a large number of projects in the fintech sector. A study conducted last year by Abilab, a think tank of the Italian Banking Association, showed that more than half of Italian banks are implementing innovative projects in the payments area, followed by security solutions (more than 35% of banks) and investment and lending platforms (more than 20%). As regards the technologies, more than a third of banks are working on big data analytics, blockchain, distributed ledger technology and artificial intelligence and a quarter of banks are prioritising cloud computing and digitalisation of traditional services.

Contributor: Alessandra Amici a.amici@abi.it