Dagong Europe: two commentaries on Italian banking system

Dagong Europe has published two commentaries on the Italian banking system: Italian Banks – Regulatory Reforms Underway and Italian Banks – Focus on Efficiency and Profitability Following the Economic Recovery.

Italian Banks – Regulatory Reforms Underway gives a snapshot of the main regulatory changes and reforms promoted by the Italian government and banking regulator in the last few years to modernise and re-shape the regulatory environment for banks. The aim is to overcome the structural features that have made them less competitive in the fast-changing environment. “At an institutional level, the Italian government has implemented and is in the process of approving long-awaited reforms, which in our view have the potential to improve the competitiveness of Italian banks”, says Carola Saldias, Head of the Financial Institutions Analytical Team.

To promote further investment in the Italian economy, in March 2015 the Italian parliament ratified the so-called ‘Investment Compact’. The law is addressed towards the larger co-operative banks (‘banche popolari’) to facilitate mergers between them. It requires that co-operative banks with total assets above EUR 8Bn abandon their ‘one-person-one-vote’ rule and convert into joint-stock companies (società per azioni). In total, 11 mid-size banks are affected, accounting for about 13% of the Italian banking system’s assets.

“In our view, the reform could speed up consolidation efforts within the co-operative banking groups and allow new shareholders to enter existing banks, promoting competitiveness. In addition, we expect that banking consolidation in Italy will result in a better landscape for improving efficiency and thus overall profitability”.

Italian Banks – Focus on Efficiency and Profitability Following the Economic Recovery  provides a summary of Italian banks’ performance to date, and how the changing market environment is challenging their return to sustainable profitability. “The negative impact of the low interest-rate environment on revenues is still likely to be limited, partly due to external supporting factors, but mainly through cheap ECB funding. Lower interest rates on assets are only slowly being introduced, and for now there is still interest-rate competition mainly on retail mortgages”, says Carola Saldias.

Dagong Europe believes that despite the improving credit environment the Italian banking system should continue to focus on improving efficiency, since it continues to be very cost-intensive compared to other European banking systems.

In addition, it should: 1) build up capital in view of expected growth and the upcoming implementation of regulatory standards; 2) focus on new lending with better asset quality; and 3) explore and test new funding alternatives such as asset-backed lending and instruments eligible for MREL (Minimum Requirement for Own Funds and Eligible Liabilities).

In the coming months Dagong Europe forecasts continued slow growth and delayed asset-quality recovery, due to the still lengthy foreclosure times for asset write-downs. This will continue to affect the performance of Italian banks, and therefore additional initiatives are needed to manage the expected profitability and reformulate the business models towards a more efficient cost structure.

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