positive outlook for 2024 on solid operating conditions

The peak of earnings driven by high interest rates is behind us, but for Italian banks, 2024 will be another year of great satisfaction, thanks to better than expected operating conditions. The analysts of Scope Ratingsthe largest European rating agency, underlining however that problems persist latent risksas evidenced by developments relating to tax credits of the various bonuses, although they should be manageable by all credit institutions.

Strong profits expected in 2024

“Italian banks showed the first quarterly decline in net interest margin since the first quarter of 2021 as the positive effect of rate hikes faded,” he said Alessandro Boratti, lead analyst for Italian banks – The average decline is due to a combination of lower margins and, once again, declining loan volumes. We see this trend continuing, even if we rule out a sharp decline in 2024. Even if we have the peak of the interest margin has been exceededbanks continue to generate strong profits.”

Revenue growth in the first quarter was driven by strong rebound in commission income, reflecting growing momentum in sales of wealth management, insurance and payments products. Spending growth, meanwhile, was subdued and the cost of risk hit a new low of 33 basis points, reflecting solid lending performance.

The Italian banks in the sample – Intesa Sanpaolo, UniCredit, BPM desk, Banca Monte dei Paschi di Siena, BPER Bank, Mediobanca, Emiliano Credit And Banca Popolare di Sondrio – they achieved in the first quarter a ROE of 14.5%. Boratti does not expect banks to achieve 2023 results this year, but believes there could be an advantage from a slower revision of deposit pricesdelays in ECB rate cuts and a less severe deterioration in credit quality.

Limited Superbonus risks

According to Scope Ratings, the government's change to Superbonus decree has dispelled fears of a full retroactive extension of the expiry of tax credits linked to ecobonuses. However, the risk of political intervention remains high. L'banks' exposure to these tax credits is significant in some casesbut the losses resulting from such exposure will be limited.

There are some signs of deterioration in asset quality, but this is within expectations. Credit quality metrics remain strong across the board. The flows of new impaired exposures (NPE) are limited ei default rates remain below banks' budgets for fiscal 2024. The average gross non-performing loan ratio remained stable for most banks; the average increased by just 10 basis points.

“We continue to expect a gradual deterioration in asset quality as the impact of higher interest payments begins to hit the most vulnerable borrowers – said Boratti – But banks are well prepared for this, as they have all forecast higher default rates than in 2023, while predicting a cost of risk stable yearly thanks to preventive provisions and high coverage”.

Capital reserves useful for M&A

According to Scope Ratings, Italian banks continued to increase capital reserves and that could encourage M&A activity. CET1 ratios increased further to 15.3% in the first quarter. Large surpluses of capital could be used to strengthen market positions, including through mergers and acquisitions, although Boratti says current market prices have made cheap acquisitions unviable as regulators call for capital accumulation.