Fitch Ratings has said in a new report that the five major Italian banks performed strongly in H107, making them well placed for a more turbulent H207. The report analyses the performance of the major Italian banks for H107 and provides an outlook for the full year results.

First half results for 2007 for almost all the major Italian banks were strong, with improvements in performance and asset quality, but with a small tightening of capitalisation. In the first half of the year, banks' funding costs were extremely low - possibly the lowest to be seen for the foreseeable future. This allowed banks to report higher margins when compared to H106, which, combined with continued growth in lending volumes, resulted in greater net interest revenues. Commissions and fees, as well as other operating income, benefited from a good performance in the capital markets. At most banks, costs have remained under control despite some additional restructuring charges needed to deal with the large scale acquisition and merger activity that took place during the period. Furthermore, good economic conditions and improvements in credit risk management resulted in low impairment charges as well as improvements in asset quality. However, impairment charges remain higher and asset quality remains worse than at the best performing European banks. Net income figures at a number of banks additionally benefited from the sale of securities and participations.

Exposure by Italian banks to the US sub-prime sector is small and has left most major banks relatively unaffected. Italian mortgages continue to perform well, partly because lending conditions applied by Italian banks remain stricter than generally seen in the US and partly because the low penetration of mortgage lending in Italy has meant that the sub-prime sector has not been accessed to a large scale yet. Liquidity at Italian banks has also remained adequate because of the high percentage of retail deposits funding banks' balance sheets and the high volume of liquid securities available to most banks for repurchase operations with the central bank in case of need. Despite market conditions, major Italian banks have also accessed capital markets throughout Q307, with some sizeable issues of senior and subordinated debt.

Nonetheless, Fitch does not expect the Italian banks to have escaped unscathed from the third quarter market turbulence as funding costs have increased. Furthermore, Fitch expects that they have had to make some mark-to-market adjustments on their securities portfolios. However, most banks are expected to report sound full year results for 2007. The overall impact will depend on how long the market disruptions continue, but the impact is not expected to be large.

The composition of the major Italian banks changed in the first six months of 2007 compared to previous years' reports because of merger and acquisition activity that increased market share among some of the banks and allowed new entrants to feature in the group for the first time. Fitch views the stronger franchise resulting from the mergers to have placed banks well in an increasingly competitive banking sector.

Fitch took several rating actions on Italian banks (Intesa Sanpaolo, rated 'AA-' (AA minus)/ 'F1+'/Stable Outlook; UniCredito Italiano, rated 'A+'/'F1'/Positive Outlook; Banca Monte dei Paschi di Siena, rated 'A+' /'F1'/Stable Outlook; Banca Nazionale del Lavoro, rated 'AA'/'F1+'/Stable Outlook; Banco Popolare, rated 'A'/'F1'/Stable Outlook; Unione di Banche Italiane - UBI Banca, rated 'A' /'F1'/Positive Outlook) during H107, largely the result of the merger and acquisition activity during the period. Almost all the ratings actions have been positive, in recognition of the increased franchise resulting from the banks' mergers. The mergers have also impacted the Support Rating Floors of the two new entrant banks on the list (Banco Popolare and Unione di Banche Italiane - UBI Banca), which were the result of two cooperative banks, and one cooperative bank and one private bank merging, respectively. The Support Rating and Support Rating Floors of both banks were raised to '2' and 'BBB', respectively.