Markets volatility is a challenge for Italian banks still on the path to reach their restructuring goals

9 years ago - Published in News

Recent market volatility in Italy has highlighted the vulnerability of some banks that are still in the process of restructuring. A prolonged period of high market volatility and uncertainty could affect Italia banks' ongoing restructuring plans.

Five are the main "pressure points" highlighted by Dbrs rating in the Italian banking system:

  • funding mix and pricing, including access to institutional markets and depositor confidence;
  • access to equity markets and ensuring compliance with capital requirements;
  • underlying economic environment and the impact on asse quality and credit costs;
  • core earnings recovery, given pressure on margins, lending and fee and commission income;
  • restructuring progress at weaker banks and growing pressure for consolidation.

All of this points determined a deterioration of investor sentiment for Italian banks between November 2015 and January 2016. Together with global financial turmoil, the recent application of new bail-in rules in Italy and Portugal has heightened investor concern for both provisioning and capital levels. Banks with weaker balance sheets have been most affected, with volatile markets effectively limiting access to institutional funding markets. Concurrently, banks’ traditional source of retail bond funding is now largely closed. In Dbrs' view, a prolonged period of high market volatility and uncertainty could affect Italian banks’ ongoing restructuring plans. Increased refinancing risk in both institutional and retail markets could contribute to higher funding costs and weaker lending volumes, while lower investor confidence could affect banks’ fee income generation. Lack of investor confidence could also hamper Italy’s fragile economic recovery and potentially delay stabilisation in asset quality. Taken together, these factors may add pressure to the banks’ already weak earnings profile. Despite improvements, Dbrs notes that some banks remain vulnerable and have yet to reach their restructuring goals. Major challenges include the successful execution of planned capital increases, an overriding need to reduce the stock of NPLs, as well as effectively dealing with pressures for consolidation and meeting stricter regulatory hurdles. Any ongoing negative market sentiment may complicate efforts and increase risks for some banks.

Dbrs European financial institutions group