Italian Bank Quarterly: record Q2 results will be hard to repeat as windfall tax looms

The positive momentum for Italian banks continued in Q2, resulting in an excellent set of results, driven mainly by wider interest margins and low loan-loss provisions. But the proposed windfall tax will curtail profitability in the second half.

“The tax on extraordinary profits is harsh. We estimate the impact in the 20bp-100bp range for the Italian banks in our sample. This decreases to 15bp-35bp if the 0.1% total assets cap is confirmed,” said Alessandro Boratti, lead analyst for Italian banks. “The tax could also force banks to reconsider generous dividend pay-outs, despite positive stress test results that in theory are supportive of distribution plans.”

News of the tax followed an excellent set of second-quarter results. Our sample of eight Italian banks (Intesa Sanpaolo, UniCredit, Banco BPM, BMPS, BPER, Mediobanca, Credem and BP Sondrio) achieved an average ROE of 14.7%, +1.6 pp above the previous quarter.

“While the tax could materially reduce annual profits, the room for further improvement was already narrowing as interest rates approach their peak amid slowing inflation and economic growth in the euro area,” Boratti said. “While assets may not yet have fully repriced, pressure is mounting on banks to increase deposit rates, particularly in Italy, where the pass-through rate is still at historically low levels. At the same time, lending volumes may continue falling because of low customer demand and tighter underwriting criteria, especially for corporates.”

As a result, most banks have adopted a cautious approach to full-year net interest income projections. First-half results and banks’ own guidance suggests NII will decline in the second half for most lenders, although we believe banks may surprise to the upside because assumptions about deposit beta (around 30%-40%) would imply a significant acceleration in repricing in upcoming quarters.

“The banks are guiding to a rebound in credit provisions in the second half but we believe their projections are conservative given the lack any of signs of credit deterioration and the banks’ constructive view on asset-quality trends for 2024. This could reflect bank’s inclination to accumulate generic provisions at the end of the year, especially because they have the margins to do so,” Boratti said.

Asset quality continues to surprise to the upside. Despite the challenging economic backdrop, credit quality is stable. Stage 2 loans remain high by EU standards and above pre-pandemic levels, although they have declined by 4% since the beginning of the year.

“But we believe it is only a matter of time before the positive trend reverses, as the impacts of tighter financial conditions are starting to show up in GDP data. We do not expect a wave of defaults, though. In recent years, Italian lenders have materially improved their management of credit origination, high-risk positions and NPLs. This will have made balance sheets more resilient to economic downturns,” Boratti said.

Fears of deposit outflows have so far proven unfounded. Data for the second quarter show a stable trend in deposit volumes but in any case a gradual and controlled decline in deposits does not pose a threat to the sector. Companies are likely to continue reducing the extra liquidity accumulated during the pandemic, partly shifting their money to government bonds alongside retail customers.

Download the Italian Bank Quarterly here.

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