The beginning of 2012 was a recovery for the Italian banking system. The top five banks totaled a profit of 1,8 billion euro against 1,7 billion in 2011. The net result also improved, rising to 3,9 billion against 3,4 billion in the same period of 2011. A significant growth especially in comparison with the last 2 quarters of last year (0,9 billion in the third and 0,6 billion in the fourth).
But there are still three difficult years ahead for the banking system which will have to manage three crucial challenges: funding, credit and capital. This is what emerges from the Prometeia sector report which sees a scenario of slow improvement in profitability, however conditioned by the economy's recovery capacity. Over the three-year period, Prometeia estimates a system Roe of around 2,5% (2% at the end of 2011 net of extraordinary write-downs on goodwill) and could exceed the 4% threshold only in 2014, returning above the value recorded in 2008, the year in which the effects of the beginning of the crisis were manifested, but remaining well below the values recorded by the banking system in previous years (about 10% in the three-year period 2005-2007). Not only. Profits, even if higher than in the past three years, will be contained and will have to contribute almost entirely to the growth of assets. "The intervention of the ECB has certainly averted a liquidity crisis of Italian banks but also of those of other countries - pointed out Chiara Fornasari of Prometeia, specifying however that it is a short-term buffer (on which disbursement cannot be built of medium-long term credit).
FUNDING – The cost of funding will remain high for the entire three-year period and a significant trend reversal is not expected. “The burden of funding – explains Prometeia – which until 2014 we indicated to remain structurally higher than in the years preceding the financial crisis, in relation to market rates, it will be conditioned by the evolution of the spread on Italian government bonds. The long path of recovery from the economic and financial tensions incorporated in the scenario will not make it possible in the short term to reduce the cost of new bond issues and the remuneration of medium-term deposits". With the difficulties on interbanking and wholesale funding, Italian banks will see the importance of the central bank and customer deposits on which competition is now fierce grow. If a few years ago it was more isolated and limited offers, now the phenomenon has extended to the whole system. Thus, retail funding compared to the past does not generate profitability because it is paid above market rates. Furthermore, the Italians' propensity to save is at an all-time low.
THE CREDIT – On the credit front, the situation is less tense than in December. The unconventional measures of the ECB, together with the credit support measures for households and SMEs put in place by the banks in concert with the institutions, will be able to improve the credit market, initially preventing a further contraction and subsequently a modest growth . Prometeia estimates an annual +2,4%. "The banking system is able to finance the good demand for loans - said Chiara Fornasari of Prometeia - it is clear that it will not reach everyone". Access to credit will be affected for a long time by banks' greater attention to risk, which will translate into a progressive repricing of credit which will also be affected by the higher cost of funding. The worsening of the economic cycle, in particular, is destined to keep the probability of insolvency of borrowers high, especially for the most fragile and indebted companies. The default rate of creditors will remain at structurally high levels throughout the three-year period and will be associated with a still significant flow of adjustments in the two-year period 2012-2013, to decrease only in 2014 "We must forget a 6-7% increase in credit - he explains Fornasari – the banking system must recompose its debt structure and its capital structure. A decade of financing methods has collapsed, in which Italy has participated little, and growth must now be closer to the real economy. Businesses too must do their part, they must grow and capitalize on themselves. If the international economic cycle works, we are sure we will make it”.
THE CAPITAL – In 2012 the capital strengthening action continued. And the capital strengthening process cannot be relaxed. The process of operators adapting to the new and more stringent capital standards required by Basel 3 regulations represents, in fact, a further constraint on the development of capital in the next two years. “The timing for reaching the new levels of regulatory ratios will have to be shorter than the gradual transition period envisaged by the reform documents (2013-2019) given that supervisory authorities and the market require banks to comply with the new requirements from from the start-up phase of the new legislation”, reads the report. Thus in a scenario of low evolution of profitability and in the light of the already substantial recapitalization actions carried out above all through capital increases, it is plausible that in the future we will mainly have to resort to self-financing from profits and from the optimization of risk-weighted assets, which means the sale of non-strategic assets, transition to advanced calculation models, reshaping towards less risky exposures. In short, the banks, grappling with Basel 3, will have to push for stronger deleveraging.
PROFITABILITY – The contribution of the growth in volumes to the expansion of the customer margin has taken on less importance: this contribution will also remain limited over the forecast horizon, and only from 2013 will the customer margin return to a path of progressive growth. On the other hand, in 2012, thanks to the unfolding of the effects of the extraordinary measures of the ECB, the profitability of the securities portfolio should compensate for the weakness of the customer margin. “The increase in the cost of funding and the economic crisis – explained Fornasari – should reduce customer interest margins by 1,5% while the greatly increased securities portfolio will be able to increase the entire intermediation margin by 3-5%”. It is necessary for banks to adopt actions to contain operating costs, which means a profound rationalization, closure of branches, reduction of staff and rationalization of sales channels. In the Prometeia scenario, operating costs should decrease during the two-year period 2012-2013, to recover from a weak growth only in the last year of the forecast. It is necessary "In the light of the reform of the pension system, however, the tools for controlling personnel costs will have to be remodulated, through which important efficiency objectives can be achieved", reads the report. Furthermore, the quality of the loan ratio remains deteriorated but an explosion is not expected
However, this is a scenario that incorporates recession hypotheses for 2012 but also a slow and gradual process of reduction of the spread, while bearing in mind the phases of turbulence also linked to electoral appointments. “One of the risks – explains Professor Giuseppe Lusignani – is that the path could be more bumpy, with a higher level of the spread than what we have incorporated. In this case, Roe would drop from 3-4% to 2-3% in the worst case scenario".
Furthermore, in the future the differences between the banks will increase especially in relation to the size factor. “As also demonstrated by the results of the 2011 financial statements the differences between the banks are widening mainly reflecting the size factor – concludes the report – In the coming years, the variability with respect to the prospects outlined for the system as a whole will increase significantly, as a reflection of the different ability to react to the greater complexity of the outlined scenario through actions to remodulate business strategies and cost efficiency ”.
Attachments: Press Summary_Prometeia Banking Day 2012.pdf
