Italy’s financial sector is still plagued by non-performing loans, and impairment charges and provisions are now hitting profits. Danielle Myles reports. 

As revealed by The Banker’s recent Top 1000 rankings, Italy’s banking sector has the dubious honour of being the least profitable in the world. Its 2016 sector-wide pre-tax loss of $16.3bn is largely attributable to UniCredit, which posted a €10.88bn loss thanks to one-off charges.  

But the sector’s troubles run deeper. Of its top 24 banks, last year only half posted a profit and four improved their profit performance from 2015; one of the latter, Banca Popolare di Vicenza, has since been categorised as ‘failing’ by regulators and is now being wound up.

Data collected by The Banker reveals that the main culprits are non-performing loans (NPL) and the provisions that must be set aside as a result. This is revealed by comparing total operating income with total impairment charges and provisions (ICP) which is the loss banks must recognise on their loan book every year to reflect the true state of their assets, given that not all will be repaid, or not on the terms initially agreed. 

The ICP-to-income ratio of Italy’s biggest 24 banks was 51.93% in 2016, up from 25.82% the previous year. This means half the sector’s income in 2016 was essentially wiped out by the provisions banks made for problem loans. It is no surprise that at banks where this ratio is particularly high, there is a strong inverse correlation with profits. After all, when ICP eats up such a large proportion of your returns, a loss is all but guaranteed.

The country’s six biggest banks with an ICP-to-income ratio that exceeded the national average all recorded a loss. UniCredit’s ICP-to-income ratio was nearly 70%, almost 50 percentage points (pp) higher than in 2015, backing up its CEO’s claims that its huge loss was caused by one-off charges to clean up its balance sheet. The beleaguered Monte dei Paschi, which is undergoing a state-backed precautionary recapitalisation, lost 95% of its returns to provisioning, up from 36% the year before. Meanwhile Bergamo-based UBI Banca’s ICP-to-income ratio soared 23 pp to hit the national average.

Italy has been portrayed as the main instigator of Europe’s growing NPL stockpile, which is now so serious that EU authorities want to create an EU-wide bad bank to tackle the problem.

Undoubtedly Italy’s NPL ratios are higher than the bloc’s average, but by a smaller margin than many perceive. This is because Italy does not disclose its soured loans using the global standard NPL formula (loans those more than 90 days overdue). Instead, it takes a broader approach by categorising all loans overdue (even if only by one day) – plus those not yet due but which are not expected to be recovered in full or on the terms agreed – as ‘problematic’.   

Some commentators confuse the two concepts, which is why local bankers and policy-makers frequently note that the €360bn figure often ascribed to Italian NPLs is inflated. Bank of Italy governor Ignazio Visco, who last year said €87bn is a more accurate figure, has suggested the country’s biggest banks could see their NPL ratios fall below 8% by the end of this year.  

Some lenders are making bigger strides than others. Intesa Sanpaolo is the best performer, having reduced its NPL ratio by 1.3 pp between 2015 and 2016, while the laggard is Genoa-headquartered Banca Carige which saw a rise of 4.35 pp. As a group though, NPLs and ‘problematic loans’ at the country’s biggest banks are dropping while ICPs are rising. It suggests that the sector is forging ahead with cleaning up its loan books. If they continue on this trajectory, loan losses should be less in 2017.

Italy's biggest banks 0817

All data sourced from www.thebankerdatabase.com

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