eco TV Week

Italy: banks’ net income sharply declined in the first quarter of 2022

6/10/2022

Against the background of the war in Ukraine and the marked slowdown in economic activity, the return on equity of the largest Italian banks felt significantly in the first quarter of 2022. The rise in the cost of risk erased the positive jaws effect of the increase in operating income and the decrease in operating expenses. Non-performing loan ratios nevertheless remain at historically low levels while equity ratios remain at historically high levels.

Thomas HUMBLOT

TRANSCRIPT // Italy: banks’ net income sharply declined in the first quarter of 2022 : June 2022

Against the background of the war in Ukraine and the marked slowdown in economic activity, the return on equity of the largest Italian banks sharply declined in the first quarter of 2022. The positive jaws effect of the increase in operating income and the decrease in operating expenses was totally erased by the increase in the cost of risk. The ratios of non-performing loans remain at historically low levels while equity ratios remain at historically high levels.

The economic consequences of the Russia invasion of Ukraine, the persistency of bottlenecks in supply chains, the return of inflation, the increase in energy prices in particular, the rise in interest rates and the gradual lifting of public support measures thwarted the nascent recovery following the decline of the COVID-19 pandemic. Ten of the largest Italian banks, which represent roughly 80% of the Italian banking system by their CET1, have accounted a 40% decrease in their net income between the first quarter of 2021 and the first quarter of 2022. Their return on equity declined from 8.4% to 4.9%.

Yet, the largest Italian banks had managed to increase their operating income by 2%their operating expenses. This positive jaws effect was entirely masked by a 50% increase in their cost of risk between the first quarter of 2021 and the first quarter of 2022. The situation of certain borrowers, sometimes already heavily affected by the COVID-19 pandemic, has further deteriorated. This led to an increase in the flows of new non-performing loans and also to an increase in credit risk of the stock of performing loans.

For now, the ratios of non-performing loans of the largest Italian banks remain moderate in particular after the decline noticed in 2021. Plans of disposal and of securitisation have slowed down since the period that preceded the COVID-19 pandemic. In the first quarter of 2022, the ratio of non-performing loans of the largest Italian banks stood at 3.4%. It was at 4.6% in the first quarter of 2021. Finally, the CET1 ratio of the largest Italian banks stood, on average, at 14.2% in the first quarter of 2022,a comfortable level regarding regulatory requirements and a historically high level. Let's note that this equity ratio stood at 15.4% in the first quarter of 2021. This decrease can be mainly explained by an increase in dividend distribution and share buyback in a context of increased provisioning effort.

Above all, it does not call into question the ability of the largest Italian banks to get through the year 2022 which is marked by a slowdown in economic activity and the resurgence of inflation.

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