Italian banks ended 2022 with sharply rising profits, thanks to the sudden rise in interest rates that brought margins on lending activities back to levels not seen in years. The five largest Italian banks (Intesa Sanpaolo, Unicredit, Banco Bpm, Bper, and Mps) increased their net profit by 66 percent to 12.8 billion euros. Investors had widely predicted that the wind would blow in the sector’s favor. In the six months before February 17, the Ftse Italia Banks index performed more than 66 percent, compared with 25 percent for the Ftse Mib index. In the last month alone, during which the latest quarterly reports were disclosed, the outperformance was just as pronounced: +19.1% versus +7.6% in favor of the financial stocks sector index.
Could high-interest rates for longer and a less severe economic slowdown than expected support banking stocks again? Or is it a good time for profit-taking and lightening the portfolio on these stocks?
The lowdown on Italian bank stocks
“In the reporting season just concluded, earnings of banks and the financial sector surprised positively, thanks to higher-than-expected revenues (driven mainly by net interest income) and lower provisions. The 2023 guidance provided was key to the performance of stocks, with a different outlook for improved earnings (driven mainly by net interest income with the cost of risk under control) partly offset by higher inflation costs,” Luigi De Bellis, co-head of Equita’s Research Office, told We Wealth. “In addition, Cet1 improved sequentially in many cases,” indicating more substantial balance sheets given possible increases in insolvencies, “and dividend/buy-back plans were announced that further supported the sector” through the promise of generous shareholder rewards.
“Taking the lion’s share,” eToro market analyst Gabriel Debach told this newspaper, is “above all, the willingness of many banks to continue on the path of share buy-backs due to strong balance sheets, industry stability, growing operating margins and robust cash flows.” Therefore, Debach added, “optimism about the future prevails on the part of Italian banking stocks, which are confident that they will be covered patrimonially and can take advantage of the increased profitability in favor of shareholders.”
In the latest round of financial results, average revenue growth in 2022 was 6.86 percent, standing at eurD 52.366 million from the ‘badwill’ related to the acquisition of Carige,” but also FinecoBank, which closed the year with revenue growth of 17.9 percent.
Banks outlook: which stocks to prefer looking beyond
“We believe that the ‘happy’ moment for the Italian banking sector may last throughout the first half of 2023, thanks to the continued increase in interest rates by central banks that will contribute to a marked increase in revenues and, in particular, in net interest income,” IG Italy’s senior market strategist Filippo Diodovich told We Wealth, citing the upcoming rate hikes that remain to be made at the ECB, “benchmark rates (those on main refinancing operations) would rise from the current 3 percent up to 4 percent (those on deposits from 2.50 percent to 3 percent).”
“Among banks, our favorites are Unicredit, Intesa Sanpaolo, Banco Bpm, and Mediobanca,” Diodovich added, “for so many factors not only because of their shareholder remuneration plans but also because of their efforts in cleaning up their balance sheets, their brilliant capital ratios, and the ambitious goals of their strategic plans (very positive expectations also for Mediobanca’s upcoming plan and the likely upward revision of Banco Bpm’s plan as stated by CEO Castagna).
“Another element that could further push banking stock prices is a new wave of marriages in the sector, a consolidation necessary to increase profitability further. Not so much Intesa Sanpaolo, but we believe that Unicredit, Banco Bpm, and Mediobanca could be involved in significant extraordinary transactions,” said the IG Italia strategist.
De Bellis says, “after the peak of the rate hike cycle by the ECB is touched, it will be volumes that will drive further revenue growth, along with commissions (more linked to financial market performance).” On the outlook, the indicator of future net interest income trends for banks, the forward Euribor (3-month) rate curve “remains at attractive levels and such that it does not create excessive pressure on the cost of risk, projecting for 2023-2024 an average rate level at 3.4-3.3 percent, up about 10-20 basis points from the beginning of the year.”
Should the economic slowdown also hit banks’ borrowers, balance sheets appear better equipped to cope with any increase in nonperforming loans (NPLs): “Banks now have larger capital buffers (500 basis points higher on average than Srep requirements),” De Bellis said, “they have improved asset quality, and in some cases, they have overlays (extra provisions) and a portion of loans with government guarantees.”
That said, the stock market rally has already come a long way, and the momentum may not be generalized across all major banking stocks from here on out. According to Debach, “any profit-taking may not come as a surprise, in a path that nevertheless remains well positioned to benefit from the macroeconomic and monetary environment.”
“After the strong performance of the sector, we believe that it is necessary to be more selective,” said the Equita expert, “among traditional banks, we continue to have a positive view on Unicredit, Credem, Banco Bpm, Intesa, and Mediobanca, while among asset gatherers on Fineco and Banca Mediolanum (which benefit from the improvement in the rate curve and have less exposure to the cost of risk). We prefer financial stocks with sustainable business models, no problems with impaired loans, and a large and more resilient deposit base.”
To be rewarded by the market may be those banks that prove able to maintain sustained direct deposit funding without having to adjust current account remuneration too much to the new rise in rates by avoiding recourse to “more expensive repos or institutional/retail funding (through the issuance of bank bonds).”
One issue bound to create interest in the coming months, taking into account that from March, the ECB’s balance sheet reduction (Quantitative tightening, Qt) will officially begin, will be the possible impact of a spread increase on balance sheets. Rather than national political vicissitudes, Debach concluded, “the main risks remain focused mainly on Frankfurt, where, in addition to possible restrictions on capital margins, there could be apprehensions inherent in the share of Italian debt held by the ECB (more than 30 percent to date) on a Qt path. It is, therefore, not surprising to hear Prime Minister Giorgia Meloni’s call for supporting the share of debt held by Italians. It will also be interesting to monitor developments on the Tltro changes, made at the end of October, which supported the entire banking sector.”
