Last Friday, the Italian central bank said that a worsening economic outlook poses the greatest risk to Italian banks since it dampens the earnings expectations and makes it more difficult for them to have access to the capital market.
In its bi-annual Financial Stability Report, the Bank of Italy signalled a weakening of the credit cycle with bank lending to families rising only slightly and the recovery in corporate lending coming to a standstill.
It said that risks that are stemming from the real economy and the Italian government bond market translated into asset risks for Italian banks.
The Bank of Italy stated: “The slowdown in production halts the growth in high-quality loans and if protracted, the reduction of non-performing loans.”
Italian banks held approximately 189 billion euros (£162.1 billion) in gross soured loans at the end of last year, after sales that are worth 55 billion euros in the course of 2018.
The Bank of Italy said that lower loan losses have improved the capital reserves of Italian banks, however, the gap between expected profitability and the cost of capital has worsened by 80 basis points and is negative overall by around 4.5 percentage points.
By contrast, it said that the average spread between the return on capital and its cost for larger banks within the European Union is positive by 0.8 percentage points.