Italian Banks… More improvements ahead

09 July 2018

Graham Bishop writes in Financial World that, if the benign conditions continue, then there should be time for Italian banks to deal with their massive – but increasingly manageable – legacy of bad loans.

If you are concerned about the future of the euro and the potential impact of the new Italian Government, try Googling “Italian bank problems”. Two examples give the flavour of the popular discussion that comes up, but are they presenting a complete picture? Is the EU - in the specific form of the ECB’s supervisory arm – the Single Supervisory Mechanism (SSM) – `asleep at the switch’?

• “Euromoney's latest coverage of Europe’s fourth-largest economy as its banking sector stands on the brink.” 7 February 2018
• “Italy's eurozone crisis: no easy fixes for the European Central Bank” 29 May 2018, Guardian

The financial position of the Italian banking system

How does the Italian banking system - in aggregate – compare with the rest of the EU’s banking systems? The European Banking Authority produces a quarterly Risk Dashboard that gives all the key data:

• Tier 1 capital ratio : EU 16%, Italy 14%
• Non-performing loans (NPLs): EU 4%, Italy 11%
• Coverage ratio of specific allowance for loans versus NPLs: EU 44% , Italy 50%
• Return on equity: EU 6%, Italy 8%
• Return on assets: EU 0.4%, Italy 0.6%
• Leverage and liquidity: about the same as the EU average

Overall, Italian banks are substantially more profitable than the EU average but slightly weaker capitalised – though still a long way above minimum levels. The key problem is the level of NPLs – but the Italian bank’s provisions are significantly higher than average. Italy is an €1,800 billion GDP economy so the uncovered NPLs – at €140 billion - are 8% of annual output. [...]

Full article available for consultancy clients here

 

 

© Graham Bishop