Italian banks: solid funding and liquidity against challenging backdrop

Italian banks’ funding and liquidity profiles are sound. Stable retail deposits and conservative interest-rate risk management set them apart from the recent banking turmoil. Low reliance on wholesale funding mitigates adverse impacts even more.

“Italian banks’ liquidity coverage and net stable funding ratios are well above requirements. Even though LCR will revert to pre-pandemic levels by mid-2024 when Italian banks have fully repaid TLTRO III, we expect ratios to remain at a safe distance above requirements,” said Alessando Boratti, Scope’s lead analyst for Italian banks. “Also, Italian lenders have a much higher proportion of customer funds covered by the deposit guarantee scheme than the institutions that have recently faced high outflows.”

HQLA comprise a relatively high proportion of unencumbered government bonds and banks hedge the sensitivity of their bond portfolios to changes in rates. In any case, liquidity ratios consider securities at fair value.

The potential for unrealised losses on Italian banks’ holdings of debt securities is small as banks actively manage interest-rate risk in their banking book through the swap market or by buying more floating-rate debt.

Customer deposits remain close to all-time highs. For the eight banks in our sample (Intesa Sanpaolo, UniCredit, Banco BPM, Banca MPS, BPER, Mediobanca, Credem, BP Sondrio), ‘stable retail deposits’ for the make up close to 45% of total deposits. Deposit repricing has been low so far although deposit beta should be at between 20% and 40% in 2023, according to banks’ conservative projections.

“Recent market volatility may hamper Italian banks’ access to the wholesale market but issuance needs are low as the banks frontloaded part of their annual funding plans in the past two quarters, limiting their exposure to market turmoil,” Boratti said, while pointing out that two-thirds of Italian banks’ funding derives from customer deposits.

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