“Italian banks showed the first quarterly decline in net interest income since Q1 2021 as the positive effect of rate hikes faded. The average decline was due to a combination of lower margins and, once again, declining loan volumes,” said Alessandro Boratti, lead analyst for Italian banks. “We see this trend continuing although we exclude a sharp decline in 2024. While we have passed the peak in net interest income, the banks continue to generate strong profits.”

Revenue growth in the first quarter was driven by the strong rebound in fee and commission income, reflecting the growing sales momentum of asset management and insurance products, and payments. Growth in expenses, meanwhile, was contained and cost of risk reached a new low of 33bp, reflecting solid loan performance.

The Italian banks in our sample – Intesa Sanpaolo, UniCredit, Banco BPM, Banca Monte dei Paschi di Siena, BPER Banca, Mediobanca, Credito Emiliano and Banca Popolare di Sondrio – achieved an ROE of 14.5% in the first quarter. Boratti does not expect the banks to match 2023 results this year but believes there could be upside from a slower repricing of deposits, delays in ECB rate cuts and less severe deterioration in credit quality.

Italian banks’ return on equity

Source: SNL, Scope Ratings. Not: based on statutory net income. Calendar years.

The government's amendment of the Superbonus decree has allayed fears of a full retroactive extension of the maturity of tax credits related to eco-bonuses. However, the risk of political intervention remains high. Banks' exposure to these tax credits is significant in some cases but losses from this exposure will be contained.

There are some signs of asset-quality deterioration but this is within expectations. Credit-quality metrics remain strong across the board. Flows of new non-performing exposures (NPE) are limited and default rates remain below the banks’ FY 2024 budgets. The average gross NPE ratio was stable for most banks; the average increased by just 10bp.

“We continue to expect a gradual worsening of asset quality as the impact of higher interest payments starts to affect the most vulnerable borrowers,” said Boratti. “But banks are well prepared for this as they have all budgeted for higher default rates compared to 2023, while projecting a stable annual cost of risk thanks to pre-emptive provisioning and high coverage.”

Italian banks continued to increase their capital buffers and this could encourage M&A activity. CET1 ratios rose further to 15.3% in Q1. Sizeable capital surpluses that could be used to strengthen market positions, including through M&A, although Boratti says current market prices have made bargain acquisitions unfeasible while supervisors are calling for capital build-up.

Download the Italian bank quarterly here.

Scope has public ratings on the following Italian banks:

• Banca Popolare di Sondrio SpA
• IBL Banca SpA

Scope has subscription ratings on the following Italian banks. To view the ratings and rating reports on ScopeOne, Scope’s digital marketplace, or to register, please click on the following links:

• Intesa Sanpaolo SpA
• UniCredit SpA

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