Italian banks– which in the not too distant past were one of the main sources of concern for the Eurozone as a whole– are now turning the corner and look healthier than they have been for the past few years, according to the international ratings agency Standard & Poor’s.
As stated in a recent S&P report, titled ‘Italian banks will continue to heal in 2018’, private sector creditworthiness has improved and banks’ effort to repair their balance sheets have paid off, to the extent that the agency expects a return to moderate profitability this year, after bottom-line losses in the previous three years.
”Italian banks have been strengthening their capital, bolstering loan-loss reserves, reducing their stocks of non-performing exposures (NPE’s) and cutting costs”, say S&P analysts, led by Mirko Sanna. “The government intervention to support troubled institutions (which culminated in the rescue of Monte dei Paschi di Siena) has helped to preserve the financial stability and restore market confidence. These have all contributed to the recovery, which we expect to be further supported by the economic expansion in Italy”.
After gathering momentum in recent years, S&P anticipates that Italian GDP will increase by 1,6% in 2017 (up from 1,1% in 2016), recording the highest growth rate since 2007. It also believes that this steady improvement will continue in 2018, with a projected GDP increase of 1,5% driven by the uptick in investment activity, domestic demand and exports. However, the ratings agency (and other international observers) will be closely monitoring the outcome of the upcoming parliamentary election on March 4th and the potential implications for the economy and market confidence.
In regards to this year’s forecasts, S&P projects that the NPE levels of Italian banks (which peaked at 350 billion euros in third-quarter 2015) will continue to fall in 2018, but remain above the European average. In its base case scenario, it estimates the Italian stock of NPE’s to be around 13% of customer loans by 2019 (or 200 billion euros), from an estimated 275 billion euros as of September 2017.
S&P also anticipates that net profits for Italian banks will improve in 2018, aided by a further contraction in credit losses. Rising income from commission and lower operating expenses will also help improve operating performance. This progress will follow the trend observed in 2017, for which the agency expects Italian banks to generate positive, although modest returns.
”All in all, 2018 could be an important year in putting Italy’s banks in recovery mode. But the healing process could still take a few years. It will depend on how effective the new government is at boosting the economy further through structural reforms and on banks proactively reducing their NPE stocks and taking more measures to improve profitability”, the report concludes.