Italian banks enjoy resilient, improving fundamentals

The credit outlook for Italy’s rated banks  remains stable, reflecting their resilient and, in some cases, improving  business and financial fundamentals, despite difficult market conditions, Moody’s Investors Service said in its new Banking System Outlook for Italy. The principal trigger of recent rating actions has been the significant level of domestic merger and acquisition activity taking place as the market consolidates.

“The business and financial fundamentals of Italian banks have been improving in recent years. Larger banking groups pursuing consolidation have increased their market shares and benefit from greater economies of  scale. Together, the progress in integrating banking groups and growth in scale have been driving improvements in profitability and efficiency, which are moving closer to the levels seen in other European banking systems,” said Henry MacNevin, a Moody’s Senior Vice President and author of the report.

The last 12 months in particular have witnessed a number of major mergers and acquisitions in the Italian banking sector, including the merger of Banca Intesa and Sanpaolo IMI to form Intesa Sanpaolo, and the acquisition of Capitalia by UniCredito Italiano. Outside of the top banking groups, however, considerable scope for consolidation remains, with potential positive implications for bank ratings, especially among the mid- to small-sized banks.

With regard to the current difficulties in credit markets, the Italian banking system has not been significantly affected.

“Exposure to US sub-prime mortgages is very limited among Italian institutions, as is exposure to other affected asset classes. While access to market funding, particularly securitisations, is now more restricted and expensive than prior to the current turmoil, this is not having a meaningful impact on Italian banks generally, which have well-diversified businesses and sources of funds,” MacNevin explained.

Moody’s also noted that at present asset quality in Italy is remaining fairly stable, despite strong loan growth in recent years. The rating agency said that it will be important for Italian banks to use their improved credit risk management techniques to maintain strong control over asset quality in the current more difficult market conditions.