The banking sector and politics in Italy are closely interrelated. It therefore comes as no surprise that the frequent political turmoil weighs on the Italian banking sector, despite the banks’ positive fundamental development. Above all, the continued reduction of loans at risk of default (NPLs) has created a favourable environment in the past few months. Supported by a comparatively positive economic environment up to autumn 2018 at least, the banks were able to significantly improve their credit quality thanks to securitisations and/or disposals, and to lower net NPL inflows. According to the EBA’s calculations, the NPL ratio fell to 8.3% across the sector and has therefore declined by roughly half since its high in 2015. However, it still remains well above the European banks’ average of 3.2%, despite all previous efforts and successes. The continued reduction of NPLs will therefore be one of the most important tasks facing the Italian banks in the months ahead.
The economic slowdown in Italy and throughout Europe will represent a quite considerable risk factor in this process. In particular, the less profitable Italian banking market with its weak revenue levels is heavily dependent on a stable and supporting environment. Regardless of the economic and political developments, there is also the threat of higher refinancing costs: whether in availing of the less generous TLTRO 3 or through refinancing on the market. All in all, the spell of fair weather for the Italian banking sector appears to be slowly coming to an end.