Oct 21, 2013
London, October 16th 2013 - The outlook for Italy's banking system remains negative, unchanged since May 2009, says Moody's Investors Service in a new report published today. The outlook reflects Italy's persistently fragile economic environment, problem loans that continue to increase from already high levels and weak core profits. These drivers offset some positive developments over the past year, such as banks' further strengthening of their regulatory capital levels, improved access to funding and increased liquid assets.
The new report, entitled "Banking System Outlook: Italy", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
In Moody's view, operating conditions for banks remain difficult and are unlikely to improve significantly over the 12-18 month outlook period given that downside risks for the economy remain material. Moody's therefore anticipates that banks' asset quality will continue to deteriorate, from already weak levels. In particular, the ongoing recession has severely affected corporate borrowers, contributing to the ongoing inflow of bad debt. Across the whole banking system, problem loans more than doubled in 2007-12, reaching 10.5% of total loans (2007: 4%), one of the highest ratios in the euro area.
Moody's expects that earnings will remain weak over the outlook period, driven by loan-loss provisions and a decline in pre-provision income, with the latter affected by the low interest-rate environment.
Further, pre-provision income is expected to be in part affected by items such as carry trades on Italian government bonds. Moody's believes that carry-trades are not a sustainable source of income in the medium term as it exposes the banks to the potential risk of having to repay the ost-effective funding obtained under the European Central Bank's Long Term Refinancing Operation (LTRO) unless the ECB extends the LTRO beyond February 2015.
Moreover, many banks have already improved their efficiency, so further significant cuts in operating expenses should be harder to achieve. These elements, combined with Moody's expectation that net interest income will likely be persistently low , will place pressure on profitability.
Re-disseminated by The Asian Banker