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Italian Banks: Boost from NII, Cost Management and Benign Asset Quality Underpin Organic Capital Generation in H1 2023

The commentary analyses the H1 2023 results for the five major Italian banks: Intesa Sanpaolo, UniCredit, Banco BPM, BPER, and Banca MPS.

Summary highlights from the commentary include:

• Italian banks reported an aggregate net profit of EUR 5.7 billion in Q2 2023, up 20% YOY or up 60% YOY excluding provisions for Russia and the badwill from BPER's acquisition of Banca Carige in Q2 2022. For H1 2023, aggregate net profit was around EUR 10.5 billion, up 64% YOY or up 56% YOY excluding the impact from Russia and BPER-Carige.

• Higher net interest income (NII), resilient net fees and cost management have provided cushions against future asset quality risks.

• Loan Loss Provisions were down YOY in Q2 2023 and in H1 2023. However, LLPs were up YOY in H1 2023 excluding Russia, as banks remain cautious around asset quality which, however, has improved in Q2.

• Funding and liquidity position remained sound despite further liquidity drain due to sizeable TLTRO III repayments in Q2 and ongoing, albeit less material, deposit outflows.

“Higher NII, coupled with good cost control, lower credit costs, and benign asset quality dynamics underpinned sustained organic capital generation in H1 2023, and EBA 2023 Stress Test results indicated the good resilience of Italian banks compared to the European average,” said Andrea Costanzo, Vice President from the DBRS Morningstar European Financial Institutions team. “We see NII to be close to its peak considering our expectation of a slowdown in the tightening of the ECB's monetary policy, as well as potential margin compression as banks attempt to retain market shares, and experience lower new loan volumes, and the upcoming disappearance of the contribution from the mandatory reserve held at central bank following a recent policy change.”