Banks have issued strong earnings guidance for 2024 but downside risks remain. Resilient net interest income and rebounding fees will support revenues, while operating costs and loan-loss provisions will remain under control.

Italian banks’ guidance on 2024 P&L items vs 2023

Source: Management guidance, Scope Ratings
Note: Only explicit guidance was considered. Mediobanca’s guidance refers to its fiscal period ending on 30 June 2024.

“We are more cautious given Italy’s highly uncertain macro scenario. Weak GDP growth could hurt banks’ revenues and put pressure on their cost of risk,” said Alessandro Boratti, lead analyst for Italian banks. “We also flag that the combination of high nominal yields, the Italian government’s elevated debt issuance needs and ECB balance-sheet shrinkage could in a worst-case scenario, re-ignite domestic sovereign risk, with repercussions on banks’ funding costs. Other risks include the potential for a new windfall tax or higher minimum reserve requirements.”

Boratti finally expects default rates to rise moderately this year. “But the impacts should be manageable as banks entered 2024 with strengthened balance sheets following years of improvements in credit management. Banks also hold a cushion of unused management overlays that could be used to absorb emerging losses and contain the cost of risk,” he said.

Banks are increasing their pay-out ratios while maintaining a comfortable capital position. With limited opportunities for both organic and inorganic growth, banks are increasing shareholder remuneration with a combination of higher dividend pay-outs and extraordinary share buybacks. However, capital ratios remain well above requirements and, in most cases, management targets.

Solid funding positions remain despite changing market conditions. “The repayment of TLTRO III continues smoothly, partly thanks to low funding needs to meet loan demand as deposit outflows have slowed significantly,” Boratti said.

Download the Italian bank quarterly here.

Make sure you stay up to date with Scope’s ratings and research by signing up to our newsletters across credit, ESG and funds. Click here to register.