The Governor of the Bank of Italy, Ignazio Visco, has reminded the bank members of their responsibilities as shareholders. In his considerations on the 2012 report, Visco noted that in the current difficult phase, shareholders "will play a crucial role". This means that they will have to financially support the banks, "forgo dividends when necessary" and "accept the dilution of control by favoring aggregation with other institutions, if necessary". A reminder is then addressed to both the cooperatives and the foundations. For the former, the "transformation into a spa, when necessary" "should be made easier". The governor, who does not explicitly mention the Bpm case, notes that "the regulation of cooperative banks may today be inadequate for large intermediaries" and that the rigid application of the cooperative model "may also negatively affect the strengthening" of assets. On the other hand, the Foundations have been invited to "exercise a role towards investee banks that respects the form and spirit of the law, without conditioning their management choices and organization", with the directors who must be selected "on the basis of and professionalism".
If the banking system has withstood the crisis, the ultimate guarantee of their stability, however, is the ability to generate income. From this point of view, according to Visco, the banks must implement incisive interventions on costs. Then there is the issue of non-performing loans: "the flow of new non-performing loans in relation to loans has recently exceeded, on an annual basis and net of seasonal factors, 4%, a level not reached for 20 years", noted Visco for which this flow is expected to be "high in the remaining part of 2013". The tensions in the supply of credit, he added, also seem to affect companies with balanced financial conditions.
THE BANKING SYSTEM IN THE ANNUAL REPORT
The balance sheet for 2012 contained in the Bank of Italy report notes that credit has decreased both due to the lower demand for loans and to supply restrictions, due to policies guided by expectations of a worsening of the economic situation. With ample liquidity and relatively high yields, banks thus increased the stocks of government bonds in their portfolios. "In 2012, net purchases of Italian government securities - writes Bankitalia - amounted to approximately 100 billion, concentrated above all in the first quarter of the year, following the longer-term refinancing operations carried out by the Eurosystem".
THE DECLINE IN LOANS
Loans decreased by 0,2% against +1,9% in 2011. And the contraction was accentuated in the first months of 2013: -1,3% in the twelve months ending in March. The contraction mainly concerned loans to companies, which fell by 2,2% (to 962 billion), against an expansion of 2,5% in 2011; loans to consumer households, on the other hand, remained stable at 512 billion (they had grown by 3,7 per cent in 2011). Credit dynamics were similar for all bank size classes. Loans from the five largest banking groups contracted by 1,3%, compared with an expansion of 0,7% in 2011. Loans from small banks and branches of foreign banks also declined (respectively -0,1 and -2,2 percent). While continuing to expand, lending by other large banks and by smaller banks slowed sharply. After the collapse of Lehman Brothers, the reduction in loans disbursed by the first five groups was more than offset by the increase in those of the other banks. "The more homogeneous decrease in credit between classes of intermediaries in the most recent period - explains Bankitalia - is attributable to the difficulties relating to all forms of funding and to the strong and generalized deterioration in the quality of debtors in the face of the second recession in four years".
The overall balance is that in 2012 the share of government bonds held by banks on total assets increased by 2,6% from 5,7 to 8,3 percent (data on a non-consolidated basis), while the share of loans decreased by about three percentage points, from 49,5 to 46,5 percent.
COLLECTION
On the funding front, growth was 1,7 per cent (4,4 per cent in 2011), thanks to refinancing with the Eurosystem (increased by 27,9 per cent while deposits from non-residents decreased and bonds other than those held by households) and retail deposits (which grew by 3,9% and continued to grow in the first three months of 2013). Deposits of resident households and businesses contributed in particular to the increase in the latter (respectively increased by 6,6 and 7,5 per cent, while bonds subscribed by households decreased by 2,1%). Net of the refinancing from the Eurosystem, funding would have decreased by 0,8 per cent.
Italian banks have not launched repayment programs for three-year loans obtained from the Eurosystem. Cooperative credit banks made more extensive use of refinancing from the Eurosystem, also thanks to the possibility of using their liabilities guaranteed by the State as collateral, which over 200 banks took advantage of for a total amount of approximately 6 billion.
While the OMT program of the ECB has improved conditions on short-term funding, conditions on the medium and long-term funding markets have remained tense, with spreads still high. “Since the end of February 2013 – added Bankitalia – following the uncertainty of the political situation and the new downgrades of the creditworthiness of the State and of some Italian banks, the conditions on the markets for wholesale funding on maturities exceeding one year have get worse". Firms, the more solid ones, have overall increased their deposits with Italian banks. ”Among these – notes Bankitalia – some have recorded excess liquidity connected with the reduction of investment plans; others have accumulated liquidity as a precaution to prevent any future difficulties in accessing credit”.
Due to the decline in loans, the funding gap (the share of loans to resident customers not financed by deposits or bonds held by households) thus decreased by almost four percentage points, to 13,7%, compared to December 2011. In December 2012, the funding gap was negative for small and minor banks.
Short-term liquidity then improved, which in 2012 almost doubled to 8,9 per cent and between February and April 2013 stood at levels slightly above 10 per cent. By the end of 2014, wholesale bonds of approximately 85 billion will have to be repaid. “Italian banking groups – notes Bankitalia – will be able to meet these maturities also thanks to the availability of assets eligible for refinancing with the Eurosystem for around 302 billion”.
THE CREDIT RISK
The deterioration in credit quality continued in 2012. The flow of new non-performing loans from banks and financial companies operating in Italy amounted to approximately 39 billion (approximately 32 in 2011). With reference to the total economy, in the fourth quarter, year-on-year and seasonally adjusted, they reached 2,4 per cent of non-performing loans adjusted at the beginning of the period.
The deterioration in credit quality is almost entirely attributable to corporate loans, whose default rate reached 3,9 per cent in the fourth quarter of 2012, approximately one percentage point higher than in the same period of 2011. Yes this is a high value in historical comparison, close to the highs reached during the recession of the early nineties.
The increase in loans to customers in temporary difficulty (substandard and restructured) indicates that the flow of new non-performing loans could remain high also in the current year.
In terms of non-performing loans, the coverage ratio recovered in the second half of 2012, settling at 38,9 per cent in December. The supervisory action of the Bank of Italy also contributed. In the second part of 2012, the Bank of Italy launched a cycle of inspections targeting 20 banking groups that had coverage rates for non-performing loans (excluding past due or overdue loans) below the system average.
THE CAPACITY OF THE SYSTEM TO GENERATE INCOME
In 2012, the ability of the Italian banking system to generate income remained weak. “The high adjustments to loans, which eroded the savings deriving from the reduction in operating costs, had an impact – explains Bankitalia. Valued net of the extraordinary items associated with the impairment of goodwill, the return on capital and reserves (ROE) fell by 1,3 percentage points, to 0,4 percent”. The interest margin decreased by 4,3 per cent mainly due to the decline in intermediated volumes. The intermediation margin increased (3,1 per cent), also thanks to the revenues from trading activities, which benefited from the recovery of the markets which took place in the first and last quarter of 2012, and to those deriving from the sale of assets or repurchase of financial liabilities. The drop in costs (4,3 percent, compared to an increase of 5,4 in 2011) contributed to the 18,9 percent growth in operating profit. Value adjustments to loans absorbed 86 per cent of operating profit (65 per cent in 2011).
CAPITALIZATION AND BASEL 3
The strengthening of the best quality capital endowment (core tier 1) and the reduction of risk-weighted assets led to an improvement in capital ratios. In 2012, the core tier 1 ratio would have increased by 1,4 percentage points, to 10,7 percent. The tier 1 ratio and the total capital ratio would have grown, respectively, to 11,1 and 13,8 per cent (1,1 and 0,8 percentage points more than at the end of 2011).
Convergence continues between the level of capitalization of the two largest Italian groups and that of a sample of 11 large European banks comparable to the former both in terms of business model (characterised, inter alia, by a significant international presence) and size (assets budget exceeding 600 billion euros). At the end of 2012, the tier 1 ratio of the European sample was equal, on average, to 13,3 percent (11,7 for the two Italian groups). Financial leverage, measured by the ratio between total non-risk-weighted balance sheet assets and core capital, was instead considerably lower for the two Italian banks than for the European ones.
At the end of last year, the data relating to the 13 banking groups participating in the international monitoring of the Basel 3 standards indicate that by simulating the rules when fully implemented, the overall need for top quality capital for the banks in the sample that do not yet comply with the requirement would amount to 8,8 billion (it was 9,4 in June 2012). The other intermediaries in the sample, on the other hand, would have a large capital surplus.
