Italian banks: solid Q3 performance; constructive outlook for 2023
The third quarter return on average equity for the eight banks in the Scope sample (Intesa Sanpaolo, UniCredit, Banco BPM, Banca Monte dei Paschi di Siena, Mediobanca, BPER Banca, Credito Emiliano, and Banca Popolare di Sondrio) was 7.1%. The key drivers for the strong performance were the rebound in net interest income, strong cost management, and low risk provisions.
Return on average equity – 3Q22 vs 2Q22 and 3Q21
Source: SNL, Scope Ratings
Note: Excluding figures impacted by one-offs. MPS not included
On the flip side, volatile financial markets continued to hurt fee and trading income, which trended lower for most banks in Q3, and weak financial markets continued to weigh on asset management product sales, managed volumes, and performance fees. But banking and payment fees grew on the back of a resilient Italian economy, assisted by a tourist season that benefited from full post-pandemic re-opening.
“If the economy takes a turn for the worse, the banks are well capitalised. The largest Italian banks held an average MDA buffer to CET1 requirements of around 590bp as of September 2022, a level we deem comfortable,” said Alessandro Boratti, an analyst in Scope’s financial institutions team.
Some banks have significant buffers to their capital requirements and to their own internal targets so they may continue to pursue distribution plans and even one-off dividends or share buybacks. Supervisors have shown some unease about the souring economic outlook, though, urging banks to be prudent about macroeconomic assumptions and cautious about distribution plans.
“We do not expect a repeat of Covid-style blanket bans on distributions but we side with the supervisors’ view that in the face of increased macro uncertainty aggressive payout commitments may lower the banks’ room for manoeuvre,” Boratti said. “Comfortable buffers are a factor supporting our ratings in Italy. A significant run-down of capital buffers would have negative implication for the banks’ credit profiles.”
Despite the deterioration in the macro environment, Scope remains constructive on the outlook for 2023. “Visibility has improved and as market rates have moved to price higher-than-expected policy rates, the revenue outlook for banks looks brighter,” Boratti said. “A higher-than-expected increase in interest rates could drive net interest income up by up to 25% over 2021.” Borrowers, meanwhile, are resilient, thanks partially to government measures to mitigate the cost of rising energy prices. Banks are not yet seeing signs of deterioration in credit quality
Boratti believes bank profitability in 2023 will be driven primarily by two factors: the gradual repricing of the balance sheet to a more favourable rate environment, which will continue to boost revenues; on the downside potentially higher cost of risk, although this will largely depend on the shape and duration of the upcoming recession.
“We are cautious about the risks stemming from a worsening macroeconomic outlook. A recession would hurt banks from multiple sides – lending, fees and commissions, and credit costs – leading to lower net results. Targeted fiscal measures to support households and companies at a time of high energy prices could be paramount to preventing a wave of loan defaults,” said Boratti.
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