How the Italian banks will go. Cer report
Brief excerpt from the latest "Bank Report" by CER (Centro Europa Ricerche)
In the short space of a few months, the international economic scenario has profoundly changed. If in the previous report a moderate expansion was envisaged in the euro area and in Italy in 2020, now the base scenario foresees a deep recession in Italy, in the euro area and also at a global level. The spread of the pandemic has canceled in a few weeks the progress on the trade front that had been made following the agreement between the US and China, has canceled the prospects of acceleration of the US economy following the easing of monetary and fiscal policies in view of the presidential elections, it overshadowed the tensions in the Middle East.
In this context, monetary policies have been profoundly changed and central banks have promptly intervened to reduce the volatility of financial markets and limit the impact of the pandemic on the economy. All central banks have launched massive stimulus measures, even if the European Central Bank was the slowest to intervene, incurring communication errors that generated strong fluctuations in the financial markets. Net of these errors, monetary policy has now taken on an ultra-expansionary approach in all jurisdictions.
Financial markets showed extreme fluctuations in the first half of 2020. First there was the collapse of the months of February and March, coinciding with the spread of the pandemic from China to the rest of the world, and then the recovery on the wave of measures expansionary monetary and fiscal policies. However, it can reasonably be said that the recovery in stock market indices is not fully in line with economic fundamentals and, as in the case of the United States, with the health situation, which has never been brought under control. It is useful to provide some indication on the fluctuations of the indicators to understand the extent of the phenomenon: the FTSE Mib index lost 37.5% between the beginning of the year and the minimum and then recovered 35.8% in the first ten days of August; the Dow Jones lost 35.6% and then recovered 49.5% from the low; the German Dax lost 36.9% between January and the low before recovering 54.2% and the French Cac40 first lost 37.8% and then recovered 35.4% from the low.
In this context, spreads on sovereign bonds in the euro area also first increased, due to the aforementioned communication error by the ECB, and then decreased after the launch of the extraordinary monetary policy measures and the approval of the various fiscal stimulus packages . In real terms, the euro area economy underwent two short-term contractions in the first two quarters of 2020: -3.6% and -12.1% cyclically. The two nations most affected in the euro area were Spain and France, which recorded short-term drops in GDP of -18.5% and -13.8% in the second quarter. Economic activity picks up in the third quarter, but two doubts persist: 1) will the recovery in production be such as to quickly recover what was lost in the first two quarters? 2) in light of the resumption of infections, the restoration of some measures to combat the spread of the virus cannot be excluded, with the consequent economic repercussions. What will be the impact on the production recovery? The prospect of a steep recovery is strictly dependent on the possibility of containing the second wave of spread of the virus. If this can be done, the economy will also benefit.
On the European banking front, the most important news came from Italy, where the acquisition of UBI Banca by Intesa Sanpaolo was completed. This acquisition will give life to one of the top ten banks in the euro area and will allow Italy to have a greater weight in the international scenario of the credit sector. The only doubt that this operation raises is the increased dependence of the new bank on the Italian economy. Intesa Sanpaolo has excellent profitability and the acquisition should further increase the bank's profits, but this would be strongly linked to the trend of the national situation, with the risks that this entails. An acquisition of equal importance, but carried out abroad, would probably have been more difficult to build and finalize, but would have led to fewer problems with antitrust authorities and would have allowed the bank's sovereign risk to be diversified.
SITUATION AND PERSPECTIVES OF THE ITALIAN BANKING INDUSTRY
In Italy, interventions to support the credit sector have given impetus to business credit. In a short time, and starting right from the months of the spread of the pandemic, the stock of credits to the productive sector reversed the downward trend and began to expand. Thus, while credit to households showed an obvious slowdown during the months of lockdown, the same did not happen for corporate credit. This is a very peculiar phenomenon, given that in the event of such deep crises and with not rosy prospects on the resilience of risk, a credit crunch should be expected. However, the measures to support the liquidity of companies, the moratoriums and the public guarantee on new loans have favored the granting of loans and enabled unprecedented growth in credit. Furthermore, these measures will prove very useful in the coming months, because they will support companies in the economic recovery phase.
Coming to the results of the financial statements, 2019 closed with a decrease in profit, as forecast in the previous Report, and with a trend in the individual items in line with expectations. Net interest income fell, other revenues fell, as some extraordinary items no longer exist, and the reduction in provisions was unable to offset the decline in income. For this reason, profits fell to 7.5 billion compared to over 12 billion in 2018. Banking activity had started 2020 following the trends of recent years, but then the pandemic, quarantine and interventions by Governments and Banks Power plants have profoundly changed prospects. The forecast incorporates interest rates at historic lows throughout the forecast period, with a slight reversal only in 2022. This will negatively impact the interest margin, which will remain at levels below the historical average. For some time now, banks have been compensating for the reduction in interest income by focusing on other forms of revenue. However, in 2020 this form of revenue is also expected to decline due to the income lost in the quarantine period to the minor banking activity.
Furthermore, according to our forecasts, non-performing loans are expected to be stable in 2020 and growing in 2021, but not worryingly. At the same time, the rise in provisions will contribute to undermine the 2020 result, in which we expect an operating loss, but will not completely cancel profits in 2021. In summary, the forecast on the banking system shows an operating loss in 2020, a return to profit in 2021-22, but with a lower profitability than expected in the Banks Report at the end of 2019.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-andranno-le-banche-italiane-report-cer/ on Sun, 20 Sep 2020 04:57:31 +0000.