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Italy’s banking sector: Facts & Figures

Updated September 2018 – For earlier editions of Facts & Figures click here

The economic recovery in Italy is gaining pace, mainly supported by domestic demand. GDP growth increased in 2017, rising to 1.5% from 0.9% in 2016. It is expected to moderate in 2018 and 2019 but to remain positive and higher than 1%. The improved outlook is translating into higher consumption and investment, which will be beneficial for the whole economy and for the banks.

The ongoing economic recovery is helping Italian banks to strengthen their balance sheets and accounts. In 2017, with the precautionary recapitalisation of Banca Monte dei Paschi di Siena and the orderly liquidation of Banca Popolare di Vicenza and Veneto Banca, the headline risks have been removed and the perception of the market on the solidity and the positive perspective of the Italian banking sector has improved.

Lending to the private sector has been expanding again since the end of 2016. The figures of April 2018 show total loans to households and firms are growing at around 3% year-on-year.

In particular, lending to firms, which was slowed in part by firms’ abundant liquidity, is increasing again – currently at around 2.2% on an annual basis – in connection with the acceleration of investment underway since the second half of 2017. The economic recovery is supporting firms’ profitability, reducing their vulnerability.

Loans to households continued to increase at a robust pace, with an annual growth rate close to 3%, driven by loans for house purchase due to the recovery in real estate market transactions and the favourable credit conditions offered by banks.

Customer funding remains a strength for Italian banks. In particular, deposits continue to increase, at an annual growth rate of approximately 5%, while medium and long-term bond funding declines.

Credit risk is falling to pre-crisis levels. The flow of new non-performing loans (NPLs), which has been decreasing since 2014, stands at about 1.7% of total loans, below the pre-crisis average.

The stock of NPLs is also diminishing at a remarkable pace, also due to massive disposals of NPLs. In May 2018 (latest figures), net bad loans or “sofferenze nette” fell to about €49 billion (2.8% as a percentage of loans), 45% less than the peak touched in November 2015 and 43% less than the amount at year end 2016. The volume of total net NPLs amounted to around €110 billion.

The reduction of NPLs inflows combined with the increasing outflows indicate a strong improvement in the asset quality. The gross NPL ratio, which declined from over 18% in 2016 to 14.5% at December 2017 – or 13.4% following one major NPL disposal deal closed in the first half of 2018 – is expected to fall below 10% in 2019 and under 6.1% by year end 2021 according to the forecasts of the Italian Banking Association (ABI).

The coverage ratio for NPLs is above the EU average and grew from 50.4% at December 2016 to 52.7% at the end of 2017.

Capital adequacy has also increased and is well above the prudential minimum target. Common equity tier 1 ratio stood at around 13.3% at year end 2017 for the Italian Significant Institutions (up from 10.4% in 2016) and at around 13.8% for the whole banking sector.

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 2017 the aggregated return of equity (ROE) rose to about 7% (from -6% in 2016), buoyed mainly by extraordinary components (net of these items, the ROE would have amounted to around 4%).

The restructuring of the Italian banking sector continues, partly induced by the changing regulatory environment and the digital revolution. This affects not only the banks’ business mix and structure of costs, but also the composition of the sector itself and its consolidation.

Many Italian banks are facing a delicate transition from the traditional credit intermediation business model to a more diversified model, with lower exposure to credit risk, also reducing the number of branches – decreased by 20% between 2008 and 2017 – and increasingly relying on digital resources. With respect to the latter, the digitalisation of banking customers has shown a strong acceleration in the last five years. The use of online banking grew in 2017 and, by year end, 62% of customers have accessed their banking services online (43% in 2012).

The consolidation of the sector also continues, even if the sector is already less fragmented than often claimed: excluding foreign banks branches, the Italian banking sector consists of fewer than 120 independent banks – including banks’ holding groups, standalone banks not included in the any groups and three mutual bank groups which will soon emerge from the merger of the 289 mutual banks as a consequence of the recent national reform in the sector of mutual banks.

In 2017, the largest cooperative Italian banks were transformed into joint stock companies, as required by a law approved in 2015. Two of them consequently merged (Banco Popolare and Banca Popolare di Milano), creating Italy’s third largest banking group thus increasing further the degree of concentration in the sector.

Market appreciation of Italian banks’ progress is confirmed by the increasing presence of foreign institutional investors in banks’ capital: based on ABI calculation based on Thomson Reuters data, the share of the largest Italian banks’ capital held by foreign funds has increased by 12 percentage points between 2011 and 2017. At year end 2017, the share of capital held by foreign funds was around 32%.

Contributor: Alessandra Amici a.amici@abi.it

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