"The Italian economy is doing well” syllables Mario Draghi at the start of the press conference on the green pass. Christine Lagarde continues: “For the first time since the outbreak of the pandemic we observe that companies are returning to apply for credit to make investments capital account and this is an important sign of confidence for the future”. In short, a positive if not ideal climate is emerging to focus on the recovery of the banking system after years of Lent characterized by: a) very low interest rates (and profitability), b) deteriorated loans and to be disposed of through sales and write-downs; c) more stringent capital strengthening constraints, eroded in the meantime by losses.
He will think about promoting optimism, then the return to dividends, starting from the end of the third quarter of 2021, already anticipated by Andrea Enria, the head of Supervision of the ECB. As Morningstar's Johann Scholtz explains: "As banks begin reporting second-quarter earnings and the market gets a better sense of their returns on capital, there could be a major boost to stock prices." European banking authorities will also announce the results of their stress tests at the end of July. “This too will give investors a more detailed picture of which banks are best placed.”
Without neglecting caution because the president of the European Banking Authority (EBA), Josè Manuel Campa, has called for prudence, in the light of the fact that in Europe "NPLs increased significantly and they may and will continue to do so, albeit at a slower pace.”
But such caution can be countered by a good dose of optimism. Pierpaolo Breganti, research director of Wisdom Tree Europe, believes that 2021 and the coming years can represent a turning point, for at least 5 reasons:
1. Interest rates should rise again, in part they are doing so, and with them the interest margin, ie the margin deriving from the banking activity "historical feature" of the so-called "money management". It is the most historic and obvious job of banks, made up, on the one hand, of deposits from customers at the lowest possible rate and, on the other, of loans to customers, in the most remunerative and least risky way. The gradual rise in lending rates and the defense, for now easy, of zero-cost funding should be reasonably possible.
The cost of funding, mainly on demand and less and less dependent on bond issues, remains stably low for now, at 0,33%5 while the liquidity of the "system" is always overabundant, with liquid balances on current account deposits which mark the historic record of Euro 1.357 billion.
2. It is expected an increase in revenues from services, typically remunerated on a commission basis, and mainly from payment, collection and collection services, securities brokerage, securities trading, asset management and pension schemes.
3. Analysts predict a decrease in operating costs, as a result of the slimming cure on networks of branches, staff (in number, average age and salary), and investments in fintech, which has made customers increasingly independent with "home banking"1.
4. It is expected a decline in provisions and loan adjustments, thanks to the work of "cleaning up the balance sheet" in recent years, which has drastically reduced non-performing loans in the banks' assets and the greater selectivity in new disbursements.
5. On profits over the next few years, for some listed banks, it is imaginable a lower level of taxation, thanks to the "tax recovery" of the losses suffered in past years.
Other more political considerations can be added to these industrial considerations:
- Banks can, as already mentioned, return to pay dividends, exceeding the limits currently in force until 30 September 2021 (due to the debt moratorium).
- The Italian government, at the push of the EU, is pushing for a greater concentration in the sector. In particular, that the Italian government can redefine and expand the tax advantages in the event of banking combinations and mergers, starting with the so-called DTAs (Deferred Tax Assets), also aimed at facilitating the sale of the absolute majority stake held by the Italian State in Banca Montepaschi of Siena, which should take place by the end of 2021. In an imaginary merger involving Unicredit/Banco Popolare and MPS, the historic Sienese bank, despite being the smallest partner, would be the one that brings the greatest advantage in terms of of DTA, which can be calculated in a pre-tax "reduction" of approximately Euro 3 billion.
- The Central Bank, as Christine Lagarde reiterated yesterday, will continue to guarantee the credit system plenty of money and at zero or negative cost.
