What is the health of credit in Italy? paper
What emerges from the paper "The banking system in Italy… beyond Trilussa's head chicken" by Daniela Venanzi, Full Professor of Corporate Finance at Roma Tre University. The article by Emanuela Rossi
Taking into due consideration the variety of the Italian banking system, not letting our guard down on credit risk, defending the sustainable model of cooperative banks: these are the "advice" to politicians and supervisors who come from "economics and politics", an online critical review of economic policy directed by Professor Riccardo Realfonzo of the University of Sannio. In the paper "The banking system in Italy … beyond Trilussa's chicken head" by Daniela Venanzi, full professor of corporate finance at the Roma Tre University, an examination of the state of health of the credit system in our country is made, starting from credit risk.
In the latest Bank of Italy Annual Report it is noted that since 2015 the stock of non-performing loans has been decreasing with the ratio between NPLs and net loans which in 2021 stood on average at 1.7%; for the significant Italian banks, the value of the indicator appears to be in line with the intermediaries subject to direct supervision by the ECB (1.4% against 1.2%).
Then there is a recent focus drawn up by the Mediobanca study area on the Italian banking system in 2020 which shows that out of 330 institutions that exercise ordinary credit, only 175 are virtuous, i.e. they do not present critical aspects and the remaining 155 have at least one indicator beyond the thresholds defined as critical.
THE ANALYSIS BY CLUSTER
According to the scholar, however, it is useful to provide a more disaggregated picture of the Italian banking system that distinguishes the tails of distribution both from the point of view of credit risk and economic-financial fundamentals. For this reason, the paper presents a cluster analysis starting from the data provided by Piazzetta Cuccia and relating to the 2020 financial statements of 301 commercial banks operating in our country with tangible assets of over 50 million euros, including branches of foreign groups. On the other hand, securities credit institutions and savings management institutions are excluded. The goal is to identify risk clusters.
THE INDICATORS
Seven indicators are considered to measure credit risk: the ratio between non-performing loans and loans; the weight of suffering; the weight of probable defaults; the texas ratio measured as the ratio between the presumed value of non-performing loans and the primary quality portion of banks' own capital; leverage, measured as the ratio between tangible net assets and tangible equity; finally, two indicators that measure the portion of guaranteed net loans, ie covered by a guarantee, which can be total or partial.
CHARACTERISTICS OF THE CLUSTERS
The first grouping includes 34 banks – a quarter of which are in the top 17 places in the Italian ranking (including Intesa Sanpaolo and Unicredit) – with a Npl ratio on gross loans of 3.7% and a texas ratio of around 20 %.
In the second cluster we find 88 banks, almost all cooperatives, three quarters of which are located in the north-east. These are smaller institutions with one of the most homogeneous profiles of the whole sample, lower risk, gross NPL incidence of 3.8% and Texas ratio of 14.3%.
In the third there are 98 banks, the average composition is similar to that of the total sample but there is a greater incidence of cooperative banks (78 are cooperative banks). The banks in question present a certain degree of risk (gross Npl incidence over 5% and texas ratio at 28%, the highest after cluster 5). Productivity is also the lowest after cluster 5.
The fourth grouping brings together 42 banks with a risk profile and reduced average size similar to those of cluster 2 but slightly riskier in terms of greater weight of non-performing loans on NPLs. The cooperatives present are 60% located in the South and Islands.
Finally, there is the last group which includes the 37 riskiest banks, with gross NPLs accounting for 6.6% of loans, a texas ratio on average equal to 60% and which exceeds 71% in a quarter of the banks. The average productivity is among the lowest and the results are unsatisfactory. They include Montepaschi , Banca Cambiano, Cassa di Ravenna and two popular ones including Banco Bpm. Half of the 30 cooperative banks included are located in the centre.
As can be understood from these elements, those in the latter cluster are the problematic banks with high credit risk values and poor performance. The banks in clusters 2 (solid banks) and 4 are the least risky with the former boasting greater operating efficiency, better capitalization and a greater focus on credit intermediation. Those in cluster 4 are instead more diversified and less efficient but with higher profitability. The banks in cluster 1 (with low risk and average performance) have a greater degree of diversification, are very varied in size, have low risk and moderate operating profitability/efficiency. Finally, the institutes of cluster 5 show a certain degree of risk and a moderate incidence of NPLs on loans. In this case, the profitability of the business is more linked to the risks assumed than to operational efficiency (these are potentially problematic banks).
THE PICTURE THAT EMERGES
A "only partially reassuring" picture emerges from Venanzi's paper: 37 banks still have a high credit risk, low capitalization and a business model that does not generate profitability; another 98 banks have moderate credit risk and poor operating efficiency. There are 120 institutions with low credit risk, ie 40% of the sample but with managed assets equal to only 5.8% of the system. Only the 34 banks in cluster 1 have limited risk.
In short, the commercial banks covered by the paper – which, we recall, have assets of more than 50 million euros for total assets of 3,152 billion – have an average incidence of NPLs on loans equal to 4.74%, a higher level than 40% than the average figure reported by Bank of Italy.
And again: bad debts are on average 45% of NPLs and UTPs 52%; the texas ratio on average 25% but highly variable according to the different clusters; profitability is reduced even for the best performing institutions; operating efficiency is limited given that the cost income averages 79% or is close to 80%, considered a critical threshold.
Furthermore, in pulling the strings of the speech, it is noted that 135 banks – the problematic ones -, i.e. 45% of the total, show a high or at least moderate risk, accompanied by poor profitability and poor operational efficiency and productivity. It should also be noted that, although the size of the institutions "does not have a unique effect on risk and performance", clusters 2 and 4 – i.e. those made up of smaller banks of similar size – are those with lower risk. On the other hand, the category seems to influence, at least in part, the business model given that the clusters with a greater presence of cooperative banks show less diversification and more operating efficiency, discrete average profitability. The geographical location certainly influences the risk and performance profile, at least as regards the cooperative banks: the least risky ones are mostly located in the north-east, the riskiest ones in the centre-south.
In short, the recommendation is to avoid the illusion of the "average figure" and the simplification of the "one size fits all". Therefore, taking up the title of the paper, one thinks of Trilussa's sonnet: "I'll explain: from there you count that if they do according to the statistics now, it turns out that you get one chicken a year: and, if it doesn't enter your expenses , statistics enter into it all the same because there is a cave that eats two”.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/qual-e-lo-stato-di-salute-del-credito-in-italia-paper/ on Sun, 04 Dec 2022 06:20:17 +0000.