(Finance) – DBRS Morningstar sees the upward trend of the NII (Net Interest Income or interest margin) as a lever for Italian banks to absorb the greatest risks due to an expected deterioration of the economic outlook in 2023. However, the incremental benefit deriving from any further interest rate increases by the ECB will progressively decrease, as part of the increase will be absorbed by the increase in funding costs.
Furthermore, the rating agency believes that the boost to the NII from the Targeted Long-Term Refinancing Operations program (TLTRO) of the ECB disappears after the recent recalibration of its conditions and when the Italian banks will start to redeem these funds.
“We see the upward trend in net interest income as leverage for Italian banks to absorb higher risks due to an expected deterioration in the economic outlook in 2023,” he said. Andrew CostanzoVice President of the DBRS Morningstar Global Financial Institutions team – Furthermore, Italian banks are entering this new phase of high economic uncertainty with stronger risk and capitalization profiles than in the pastthanks to the progress made in de-risking”.
The big Italian banks (Intesa Sanpaolo, UniCredit, BPM desk, BPER And MPS Bank) saw their interest margin under pressure in the period 2010-2021 due to the low interest rate environment and the deleveraging of banks’ loan books due to de-risking. As a result, according to DBRS calculations, at the end of 2021 the aggregate interest margin was 30% lower than at the end of 2010or 3% based on the CAGR 2010-2021.
The report highlights that the “interest-earning” assets constitute the most of the balance sheets of Italian banks, representing approximately 83% of aggregate total assets at the end of September 2022. The percentages vary between the main banks: 92% for MPS, 91% for BPER, 85% for BPM, 83% for UniCredit and 79% for Intesa. In any case, these high percentages will “gradually work in banks’ favor as liabilities tend to reprice more slowly than assets, which means that interest rate hikes will be beneficial to the NII in the short term, until rates will reach certain thresholds”.
DBRS Morningstar notes that Italy’s big banks expect “a significant increase in the NII in 2023”, based on the higher interest rate environment and internal assumptions about the impact on funding costs. The aggregate increase in the NII is expected to be approximately 4.2 billion euros in 2023equal to approximately 19% of aggregate net interest income in 2021 and approximately 59% of aggregate net attributable income in 2021.