Italian banks strengthen asset quality in Q2'22

Italian banks made some of the greatest improvements in asset quality among European lenders in the 2022 second quarter, S&P Global Market Intelligence data shows.

UniCredit SpA reported the biggest reduction in its problem loans ratio on a quarterly basis in a sample of Europe's largest banks. The Italian lender, which in late June agreed a deal with credit servicer Prelios to manage its unlikely-to-pay loans, had a problem loan ratio of 2.5% at the end of the quarter, down 128 basis points compared with the previous quarter, and 156 basis points lower than a year earlier.

Italy's largest bank by assets, Intesa Sanpaolo SpA reported the largest year-over-year decline at 169 basis points to 2.16%. It reduced its total nonperforming loans by 13% to €6.16 billion year over year during the first half.

Banco BPM SpA and BPER Banca SpA were also among the biggest improvers, despite their problem loan ratios being some of the highest in the sample.

Banca Monte dei Paschi di Siena SpA bucked the trend, with a 5 basis point year-over-year increase. It had the highest problem loan ratio in the sample at 4.57%, but the bank said in its second-quarter earnings presentation that its nonperforming exposure coverage pro forma improved to 45.6% after finalizing a €900 billion NPE portfolio sale.

Disposals over the past three years and low inflows of new NPEs meant Italy's banking sector reported the lowest ever amount of gross and net NPE by June, according to Mirko Sanna, S&P Global Ratings Europe's financial services lead analyst.

"With the pandemic, everyone feared a wave of nonperforming loans, including from loans under moratoria," said Marco Troiano, Scope Ratings' head of financial institutions. "This wave never materialized. In fact, credits subject to moratoria performed quite well as the programs expired."

Varying fortunes

Among Europe's five largest lenders, HSBC Holdings PLC and Banco Santander SA reported higher volumes of problem loans year over year. At HSBC, stage 3 charges of $800 million, which included those related to China's commercial real estate sector and against Russia exposures, resulted in a net expected credit losses charge of $1.1 billion to the bank in the first half.

Santander's problem loans increased year over year for the second consecutive quarter, although problem loans as a proportion of its total loan book fell.

French banks BNP Paribas SA and Crédit Agricole Group, and the U.K.'s Barclays PLC, reported a decline in their problem loans for the second quarter compared to a year ago.

Scope Ratings' Troiano expects some asset-quality deterioration for European banks for the remainder of 2022 and 2023 due to the economic slowdown and impact of inflation and higher interest rates. "However, our base case is that the vast majority of banks will be able to absorb the increase in credit provisions out of ordinary profitability," he said.