Risks linked to world growth remain elevated
Global macroeconomic developments continue to pose significant risks to financial stability: the stronger growth expected in the emerging economies is being offset by persistent uncertainty about the outlook for the advanced countries. In the euro area inflation expectations are low for the whole of 2017.
Financial market tensions are increasing but are mitigated by the Eurosystem’s action
In the euro area and in Italy expansionary monetary conditions are helping to support the liquidity of financial markets, reduce risk premiums on corporate bonds, and limit tensions on government securities. Since the US elections bond yields have risen in all the leading economies and the spread on Italian government securities has widened. The prospect of continued modest growth in Europe and uncertainty about political developments in the main advanced countries could fuel sharp swings in financial asset prices in the coming months. Market indicators point to an increase of expected volatility in Italian equities in the first week of December, when the referendum on constitutional reform will be held.
The macrofinancial cycle in Italy is weak
In Italy the financial cycle is still weak and is likely to remain so in the near future. Lending to the private sector is very gradually benefiting from the moderate economic recovery. According to our projections, which are consistent with the latest macroeconomic scenarios, the bank-credit-to-GDP ratio is expected to remain below its long-term trend for the next two years. The Bank of Italy has confirmed the countercyclical capital buffer rate for banks at zero per cent.
The improvement in the real estate market attenuates the risks for banks
Risks for banks associated with the real estate market are diminishing as property transactions increase and prices show signs of stabilizing. New bad loans connected with lending to businesses active in this sector and to households for house purchase are expected to continue to decline over the coming quarters.
The financial vulnerability of households declines …
Market tensions have reduced the net financial wealth of households, whose financial position nevertheless remains solid thanks to low levels of indebtedness. Higher disposable income and low interest rates are facilitating debt service. The share of financially vulnerable households has fallen and is expected to remain small in 2017, even in an unfavourable scenario of a reduction in disposable income and an increase in interest rates.
… as does that of firms
The financial situation of firms is also improving, thanks both to the recovery of profitability and to lower interest expenses. Liquid assets have reached historically high levels. Lending dynamics are very uneven, largely in relation to the soundness of firms’ balance sheets. The proportion of debt held by financially vulnerable companies should continue to decline in the coming quarters.
The quality of bank credit is improving …
Italy’s banks are continuing to repair their balance sheets. The default rate has fallen to its lowest level since 2008 and is expected to continue to decline next year as economic growth proceeds. The stock of non-performing loans is also diminishing, in part thanks to some bad-debt sales, while further disposals have been announced. The NPL coverage ratio has increased and is now slightly above the average for the main European banks.
… and liquidity reserves remain ample
The deposits of households and firms continue to grow. Wide-scale participation in the Eurosystem’s TLTRO2 programme limits refinancing risk and maturity mismatches between assets and liabilities, reducing banks’ exposure to shifts in the yield curve.
Capital ratios continue to increase …
At the end of June the CET1 ratio had risen to 12.4 per cent. The leverage ratio, which measures capital adequacy relative to non-risk-weighted assets, is higher than the European average.
The EBA stress test results confirmed that the main groups could withstand adverse scenarios, with the exception of Banca Monte dei Paschi di Siena, which upon the publication of the results announced a plan to recapitalize and sell its entire portfolio of bad debts.
… but profitability falls and dents share prices
In the first half of 2016 banks’ profitability declined. Looking forward, the weak economic cycle and over-capacity will continue to exert downward pressure. Investors’ concerns about low profitability and persistently high levels of NPLs have dented share prices, which have fallen since the start of the year. Low share prices may make it more difficult to implement scheduled capital increases and those that may prove necessary, including for mergers and acquisitions.
Banks are still exposed to market and growth shocks
Overall, banks remain vulnerable to both domestic and international shocks that may affect capital markets and economic growth. Uncertainty also stems from a number of regulatory initiatives currently being finalized at international level; when implementing them, account must be taken not only of the anticipated benefits but also of the short-term costs.
Expectations as to insurance companies’ profits diminish
Financial market uncertainty and slower economic growth have adversely affected the expectations regarding the profits of Italian insurance companies. In the first half of the year earnings nonetheless remained at 2015 levels. In Italy insurance companies’ profitability is less exposed to persistently low interest rates than in other countries. Solvency margins and capital quality are high overall.
The financial tensions of real estate investment funds are abating
Net subscriptions of Italian investment funds have diminished slightly, though they are still positive. The risk that high levels of requests for redemptions could lead to the rapid unwinding of portfolios is limited, thanks to the prudent regulatory framework. Solvency conditions remain difficult for some real estate investment funds but financial flows point to a gradual attenuation of system-wide tensions.