The state of Italian banks: a letter to The New York Times from Luigi Federico Signorini, Deputy Governor of the Bank of Italy

An article published yesterday on The New York Times (A New Hurt in Italy From the Coronavirus: A Banking Crisis, by Peter S. Goodman) argues that "Italy's banks are but one misfortune away from a calamity that could force them to mount a rescue". Even though the article acknowledges the progresses made by the Italian banking system, it neglects key information on its actual condition, ending up providing quite a misleading representation of its resilience.

Plenty of evidence points to a substantial strengthening of Italian banks in the recent years.

• Asset quality. In the last quarter of 2019 the ratio of new non-performing loans (NPLs) to outstanding loans was equal to 1.2%, against a level of 2.1% in the last quarter of 2007, at the eve of the global financial crisis. The share of NPLs in banks' total loans continues to fall, also thanks to large-scale disposals made by a large number of banks. At the end of December, the NPL ratio was 3.3 per cent net of provisions (this is the true amount that weigh on banks' balance sheets), down from 9.8 per cent in December 2015.
• Sovereign exposures. At the end of January banks' holdings of sovereign bonds amounted to €316 billion, or 9.8 per cent of total assets; in early 2015 they peaked at €403 billion. From May 2019 to last January, as the appetite for Italy's bonds grew, intermediaries have made net disposals of almost €40 billion worth of government securities, confirming their role as contrarian investors who bought cheap in the middle of turmoil and sold dear thereafter.
• Capital adequacy. In the past years, Italian banks have also significantly strengthened their capital base. At end-December 2019 the average CET1 ratio of the banking system was 13.9 per cent, against 7.1 per cent as of end-2007. The gap between the ratio of significant institutions and the average for the euro-area is narrowing, and it stands now at around one percentage point.
• Profitability. In 2019 the profitability of Italian banks was broadly in line with that of European peers. While the annualized ROE, at 5.0 per cent net of extraordinary components, is still below the estimated cost of equity, benefits are expected from ongoing restructuring and consolidation. The process is especially string among small cooperative banks, and the new framework is expected to strengthen their capacity to attract investors.

In designing a response to the economic consequences of the pandemic, the Italian Government has enacted measures that will support banks when providing loans to corporates (especially SMEs) and households.

• Moratorium on loan repayments. The measure provides a credit moratorium for SMEs to contain the decline in output induced by the pandemic. The measure targets Italian SMEs that have outstanding loans or lines of credit from banks or other financial intermediaries and are currently performing on their debts. Since the moratorium does not generate new or additional charges for intermediaries (it complies with the principle of actuarial neutrality), it is neutral with respect to the requirements that intermediaries apply to assess credit quality, preventing automatic changes in the credit quality classification of these exposures.
• Public guarantee on moratoria measures. As a significant deterioration of credit quality could nevertheless occur at the end of the moratorium period, the Government has introduced a public guarantee that partially covers the exposures benefiting from the moratorium. This would also give banks an incentive to keep providing credit to the economy.
• Fiscal incentives to NPL disposals. This measure provides a temporary incentive to firms selling their NPLs in order to further strengthen their balance sheet (the incentive consists in the possibility to transform deferred tax assets into a tax credit for a value equal to about 5% of the transferred NPLs).

L. Federico Signorini

Deputy Governor