In Piazza Affari, banking institutions have been big winners in recent months. Indeed, they have yet to be able to withstand the weather of international markets. And indeed, the performance put in by Italian banks over the past six months is decidedly attractive. Compared to the 1.3 percent recorded by the broader Ftse Mib, the Ftse Italia Banks rose 15.1 percent over the same period. How can these results be explained? Will the outperformance of banks continue in the coming months?
Margins support banks
“Recently, the main Italian banks have performed better than more general indices. The reasons are to be found in a widening of margins resulting in revenue and profit levels that have nevertheless held up in a year characterized by the impact of inflation on profits in many sectors of the economy,” Rocco Probo of Consultique explains to We Wealth, who nevertheless cautions, “Expectations for the near future will have to reckon with the evolving scenario. Indeed, the repayment of LTROs could lead to cost overruns in the liquidity-raising phase, contributing to future reabsorption of margins.”
But watch out for recession
Another variable that banking institutions will have to deal with is the recession, now taken for sure by many, which could impact, depending on its intensity, the credit quality of the various banks. “The Italian banking sector has exploited the last few years to improve and lighten the weight of impaired loans on its balance sheet. For this reason, a mild recession, such as the one currently assumed by financial markets, should not result in excessive credit adjustments. Such a conclusion, however, could be too optimistic if the recession were to be heavier than currently estimated,” continues Probo, who then stresses, “Finally, one should not underestimate the differences in terms of business, hence the possible impact of what has been said above, among the various Italian banks. Banks whose business is more linked to the fees paid by savers, like all wealth management entities, are, in fact, more directly connected to the cyclicality of financial markets than to the cyclicality of the credit market.”
Attractive dividends
In any case, one anchor for investors in both inflationary and recessionary swells is dividends, which Italian banks historically distribute generously. On Monday, it was the turn of Banca Mediolanum, Intesa San Paolo, Mediobanca, and Poste Italiane, which detached coupons of 2.97 percent, 3.33 percent, 7.37 percent, and 2.18 percent, respectively. The declines recorded by these stocks on Monday should not worry investors: on the ex-dividend day, the price is adjusted for the dividend paid. “Dividends paid by major Italian banks are certainly important in terms of the nominal amount on the share price; however, a proper financial evaluation should consider the total return, thus a joint evaluation of the dividend and the change in the share price itself,” Probo concludes.
