Valentina the
MILAN (Reuters) – Italy’s two biggest banks announced record annual profits last week, showing both Intesa Sanpaolo and UniCredit benefit from lower loan losses. However, it also highlighted differences in policies regarding reserves.
Intesa’s risk cost, which measures loan loss reserves as a percentage of total loans, was 36 basis points (bp) and smaller rival UniCredit’s 12 basis points.
Bank investors will benefit because higher interest rates will boost lenders’ profits while not hurting borrowers so far.
UniCredit plans to pay out all of its 2023 profits, excluding the cancellation of tax assets, as share buybacks and dividends. Intesa also committed to a share buyback after doubling UniCredit’s provisions in the fourth quarter.
Asked about the difference in risk costs, Intesa CEO Carlo Messina said the bank chooses never to go below 30 basis points, even when there is no immediate need to finance or charge fees. said.
“Historically, banks have a lower bound on the cost of risk, and it’s very difficult to go below that,” said Stefano Gatti, a finance professor at Milan’s Bocconi University. Because all loans involve some degree of risk, it is impossible for banks to reduce their reserves to extremely low levels without reducing their lending.
UniCredit declined to comment on the matter, but industry sources said that while Intesa operates primarily in Italy, where loan losses are traditionally high, UniCredit’s operations are spread across 13 markets. He pointed out that Italy accounts for 46% of group revenue and Germany 23%. Central and Eastern Europe had 18% and 12% respectively.
Banks can record general provisions on their active loan portfolios, called overlays, to protect assets from risks not captured by the models used to calculate expected credit losses.
Jefferies said UniCredit’s overlay amounted to 1.8 billion euros ($1.9 billion), the highest in its peer group and double Intesa’s 900 million euros.
But overlays cannot be held indefinitely unless risks materialize, and their use has sparked debate among banking regulators.
The European Central Bank Supervisory Authority has underlined the review to “establish reliable and consistent provisioning practices”, highlighting “significant differences” in the use of overlays for the execution of loan portfolios.
As a further line of defense, UniCredit has more than 10 billion euros in capital, above its target threshold, which analysts say supports its huge shareholder dividends.
The group also said stricter lending standards following years of restructuring have reduced expected credit losses, leading to higher provisions.
Gatti said the reduction in loan sizes could ultimately impact banks’ profits if very strict underwriting standards keep the cost of risk low.
“Put your money aside.”
Banks’ ability to cope with a surge in non-performing loans has come under scrutiny following the euro zone’s fastest-ever interest rate hike cycle and slowing economic growth.
Despite record profits and often generous dividends to shareholders, European banks trade at a discount to their US rivals, as investors worry about the weakness of Europe’s economy compared to the US. One reason is that they are doing so.
Bank of Italy’s new president, Fabio Panetta, warned on Saturday that dangers in the banking system creep in unseen even during rosy periods, and urged Italian banks to use last year’s profits to build up capital reserves. did.
“The current macroeconomic situation is weak, interest rates remain high and default rates are expected to rise further,” Bocconi’s Gatti said. It makes sense.”
UniCredit expects its cost of risk to be less than 20 basis points this year, while Intesa, which has set aside some provisions for the sale of impaired loans, expects it to be less than 40 basis points.
Below is a detailed look at the coverage ratios of Intesa and UniCredit’s loan portfolios, with relative subsets of both good and poor performers.
Intesa’s total impaired loans amounted to 2.26% (1.16% after allowances) of total loans at the end of 2023, and UniCredit’s 2.7% (1.4% after deductions).
The total gross ratio for ECB-supervised banks in the third quarter was 2.26%.
At the end of 2023, 50% of Intesa’s impaired loans were covered by provisions, compared to UniCredit’s 47%.
(1 dollar = 0.9295 euro)
(Reporting by Valentina Za; Editing by Mark Potter)