Sovereign Debt Still a Risk for Italy Lenders, Central Bank Says

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Italian banks remain exposed to risks including slower economic growth and higher government bond yields, the nation's central bank said.

“Weaker growth and greater uncertainty are adversely affecting earnings' expectations and are making it more difficult to access the capital market” for the lenders, the Bank of Italy said in its semi-annual Financial Stability Report on Friday. “Banks remain vulnerable to negative developments on the Italian government bond market.”

The euro region's third-biggest economy emerged in early 2019 from a two-quarter recession it slipped into in the second half of last year. Still, output is set to rise the least among all the currency bloc's nations. An index for Italian bank stocks bounced 20 percent this year, after a 30 percent plunge in 2018 when bond yields soared to multi-year highs.

“The slowdown in production halts the growth in high-quality loans and, if protracted, the reduction of non-performing loans,” after the disposals made in the last few years, the Rome-based Bank of Italy said.

The economic slowdown limits the possibility of increasing interest income and, should it persist, may cause credit-risk costs to rise again, the central bank said. New increases in market volatility may lower subscriptions to asset management products and reduce fees, according to the report.

• The Italian banking system keeps strengthening. In the second half, capital ratios returned to growth, NPLs continue to decline and bond sales have resumed
• At the end of 2018, the stock of gross NPLs stood at 189 billion euros ($211 billion), or 27 percent less than at the end of 2017
• The central bank expects that the ratio of net NPLs to total loans will fall to 3.9 percent by end of 2019 and to 3.1 percent in 2021 from 4.3 percent at end of 2018
• Projections are based on the banks' plan to cut their NPLs, but the ability to reach these goals may be hindered if the deterioration in the economic outlook
• At the end of March, Italian government securities held by Italian banks amounted to 332 billion euros, or 9.9 percent of total assets
• Current account deposits are one of the most stable sources of funding for the banking system as a whole. Italian banks should encourage the growth in other forms of longer-term deposits as current accounts may be subject to short-term, sometimes broad, fluctuations at individual bank level
• The European Central Bank's new series of of TLTRO-III announced in March will help banks to keep favorable lending conditions and manage the outstanding TLTRO-II operations that are set to mature starting in June 2020

The central bank's financial-condition index, a measure of the “macroeconomic stress affecting the Italian economy,” rose last year in the run-up to the government formation and then during the months of its negotiation with EU on the 2019 budget.

• The “increase mostly reflected developments in the bond market and in the share prices of financial corporations”
• Still, the index “remained below the levels reached during the global financial crisis and the sovereign debt crisis”

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net;Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Marco Bertacche, Dan Liefgreen

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