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Italy’s banking sector: Facts & Figures

Updated December 2020 – For earlier editions of Facts & Figures click here

The Italian economy has continued to slow down last year. Real GDP growth went down from 0.8% in 2018 to 0.3% in 2019. The COVID-19 pandemic and the related containment measures had a strong impact on the real economy. Real GDP fell by 5.5% in Q1 and by 12.8% in Q2 2020 (quarter-on-quarter). However, a rebound is expected in the second half of 2020 supported by policy measures. Indeed, industrial production recorded a monthly increase of 7.4% last July (month-on-month). The expected recovery will be supported by the Italian economy’s strengths, such as high household wealth, low private sector debt and resilient banking sector.

Italian banks found themselves facing an unfavorable macro environment from an overall stronger position than they had at the start of the 2008 financial crisis. Much has changed since then: credit risk is reducing, capitalization is rising, restructuring and consolidation are going on, and profitability is recovering.

Total funding from customers showed an upward trend in 2019 driven by deposits, while retail bonds continued to decline. Overall, the latest figures indicate that total funding from customers (deposits and bonds) grew by 4.8%.

In 2019 the Italian banks’ asset quality also continued to improve steadily, both in terms of flows and stock of non-performing loans (NPLs). The flow of new NPLs, which has been decreasing since 2014, stood at approximately 1.2% of total loans, below the pre-crisis average. The stock of NPLs, net of provisions, stood at €70 billion at the end of 2019 (-22% year-on-year). Net bad loans or “sofferenze nette” fell to €26.5 billion (1.55% as a percentage of loans), 67% less than the peak touched in November 2015. The reduction in NPLs inflows, combined with the simultaneous increase in their outflows, has led to a sharp reduction in the NPL ratio: it decreased from 16.5% of 2015 to 6.6% if measured in gross terms, or from almost 10% to 3.3% if measured in net terms (which means taking into account the losses on NPLs already accounted for in banks’ balance sheet). The impact of the pandemic crisis on credit quality will be mitigated by the effects of the measures adopted by the Government.

The coverage ratio stood at 52.4% for total NPLs and 63.6% for bad loans. The ratio of net NPLs to total loans of the Italian significant groups was only 1.4 percentage points higher than that of euro-area significant banks as a whole.

Capital adequacy has also increased and is well above the minimum prudential target requested by banking supervisors. Common equity tier 1 ratio of the whole banking sector stood at around 13.9% at year-end 2019 (13.9% for Significant Banks and 16.0% for Less Significant Banks), over 60 basis points more than at the end of 2018.

In 2019, the profitability of Italian banks slightly decreased compared to the previous year, mainly due to the reduction in interest income and higher tax charges. The return on equity (ROE), net of extraordinary components, was 5.0% (4.9% for Significant Banks and 6.5% for Less Significant Banks).

The restructuring and the consolidation of the Italian banking sector is an ongoing development, partly induced by the changing regulatory environment and the digital revolution. At the end of 2019, Italy’s banking industry (comprising bank holding groups and independent banks) consisted of 113 active players. Banks have been downsizing their geographical presence since the second half of the last decade, reducing the number of branches and employees. Between 2008 and 2019 the number of branches decreased by 29% (to 24,350) and the number of employees by 17% (to 280,219). Following the streamlining of the branch network, the average number of bank branches per 100,000 inhabitants decreased by about 32% compared with 2008. The reduction in the number of branches and employees was achieved by more than 90% by Significant Banks; at the end of 2019 these banks held around 60% of the branches and employees (just over two thirds in 2009).

The digitalisation of banking customers has shown a strong acceleration. In 2019, the share of customers accessing banking services through these channels had risen by four percentage points, to 80%.

Italian banks and financial intermediaries are also developing a large number of projects in the Fintech sector. An example is offered by Spunta, the blockchain of the Italian banking sector, which already operates with 55 banks corresponding to the 82% of the sector in terms of employees. Spunta Banca DLT (Distributed ledger technology), the project promoted by ABI and coordinated by its research and innovation ABI Lab, is fully operational for the interbank reconciliation process. The 55 banks that operate on a blockchain to date have moved the entire process from a traditional slow and labour intensive exchange of telephone calls and messages to a fully technology-based solution that streamlines and automates the reconciliation of transactions.

Contributor: Alessandra Amici a.amici@abi.it