Italian Banks, Scope Positive After Quarterly Results. Higher Remuneration Justified

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(Finance) – The Italian banks I am ready for strong profitability in 2024 thanks to higher-than-expected rates and resilient credit quality. Institutions have effectively managed the initial impact of falling interest rates, while the outlook for fee-based businesses such as wealth management looks promising after the recovery in the first half. It says Scope Ratings in the usual analysis of the quarterly reports of the major Italian banks.

The champion of eight Italian banks (Intesa San Paolo, UniCredit, BPM Bank, Monte dei Paschi di Siena Bank, BPER Bank, Mediobanca, Emilian Credit And Sondrio People’s Bank) delivered solid results in the second quarter, achieving a return on average equity of 15.6%, up from 14.5% in the first quarter of 2024 and 14.8% in the second quarter of 2023.

The net interest margin remained close to the Q4 2023 peak mainly due to banks’ structural hedges, which offset the impact of the small decline in 3-month Euribor (-18 bp QoQ). Lending dynamics were mixed across the group (+0.5% QoQ), driven by different business strategies and customer segments. Deposit pass-through stood at around 16% in May 2024, benefiting loan/deposit spreads.

The commissions grew for the second consecutive quarter (+1.8% QoQ) despite seasonality. Sales of wealth management and insurance products gained momentum against the backdrop of falling interest rates and bullish sentiment in financial markets before the wave of market volatility in early August. “Italian banks remain focused on increasing revenues from complementary financial services, one of the few growth opportunities in an otherwise mature banking market,” the report reads.

THE operating costs continued to rise, driven by higher payroll costs and rising corporate spending and investments in digital innovation. One-off charges related to workforce optimization and tax credit provisions impacted total expenses for BPER and BPSO, respectively. The average cost-to-income ratio increased to 45.8% in Q2 2024, from 44.2% in Q2 2023. The average cost of risk remained broadly stable at 36 basis points, on the back of limited credit deterioration.

“Interest rates have not fallen rapidly, as concerns about persistent inflationary pressures have led the ECB to maintain a relatively restrictive monetary policy,” he said. Alessandro Boratti, lead analyst by Scope for Italian banks – And while Italian banks’ assets have gradually revalued at higher rates, the remuneration of customer deposits has been muted, reflecting the captive nature of most current accounts in Italy.”

“We stay constructive on the sector’s profitability, although there are potential downside risks – the expert added – The economic environment remains highly uncertain, further volatility in financial markets is possible and the government is mulling a measure to force banks to increase rates on current accounts. And while asset quality remains strong, we are starting to see a small increase in default rates”.

The asset quality of Italian banks remains solid, with a Average NPE ratio of 3% (stable QoQ). Credit performance is resilient, although there are now some signs of deterioration. BP Sondrio was the most vocal, citing signs of stress, particularly among retail customers due to the impact of high borrowing costs. BPER reported the highest quarterly increase in NPEs, mostly as unlikely-to-pay, although this was partly driven by a lower-than-usual recovery rate due to a delay in the implementation of a new NPE outsourcing platform. MPS’s NPE stock hit its highest in nearly two years.

Scope Ratings highlights that Italian banks’ capital positions continued to improve in the second quarter. As of June 2024, the average fully loaded CET1 ratio stood at 15.6%, over 30 bps higher than in December 2023. This was driven by both organic generation and a reduction in RWA (-0.9% QoQ). The rating agency calculates that at current profitability levels, Italian banks generate approximately 70 bp-90 bp of pre-distribution capital each quartermore than double compared to 2021-22. This supports higher shareholder remuneration. MPS announced that it will increase its dividend pay-out ratio to 75% for 2024 (previous guidance was 50%). BPER will increase it from 50% to 60%.

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