The large banks' results for 2007 were generally sound, with the exception of Banco Popolare, whose operating income suffered from the loss of equity accounted Banca Italease (rated 'BBB-'(BBB minus)/RWN) and whose capitalisation has weakened during the year. Full year results for all banks benefited from the strong performance during H107, while the turbulence in the financial markets during H207 had only a relatively moderate impact on the large banks' results.
"2008 will prove a challenging year for the Italian banks, given the weakened prospects for the domestic economy and the continuing volatility of the financial markets," says Christian Scarafia, Senior Director of Fitch's Financial Institutions team. "The Italian banks concentrate on their core commercial and retail banking business, which should help to moderate the impact of the market disruption," adds Mr. Scarafia. Nevertheless, a weakening economy could result in an increase in new impaired loans, and the banks will have to compensate pressure on fee, commission and trading income with other revenues or by further improvements in cost efficiency.
With Banca Monte dei Paschi di Siena in the process of acquiring Banca Antonveneta (rated 'A+'/RWN) since November 2007, all five large Italian banks have taken part in the consolidation of the sector. Fitch expects the merged banks to realise significant synergies and to benefit from their improved franchises over the medium-term. At the same time, however, acquisitions and loan growth have resulted in four of the five big banks reporting Tier 1 regulatory capital ratios below 7% at end-2007, with only Unione di Banche Italiane reporting a Tier 1 ratio of 7.44% at end-2007.
Fitch considers the liquidity of the largest Italian banks adequate as they, like their domestic retail banking peers, benefit from an ample source of customer funding, which to date has helped them to limit the impact of the tightened liquidity and higher funding costs in the capital markets. The banks have also continued to obtain medium- and longer-term funding through bonds placed with retail clients at favourable costs, and a number of Italian banks have continued to issue bonds in the capital market, albeit at shorter maturities and higher rates.
