Recent reports from Moody’s Investors Service reveal a nuanced situation for Italian banks. On one hand, Moody’s has upgraded the outlook on the ratings of 18 financial institutions in Italy, including 16 banks and two state-controlled institutions, reflecting a positive trend in the sector. This upgrade signifies a recognition of the overall stability and improved performance of these institutions.
However, there’s a significant concern regarding the increase in Non-Performing Loans (NPLs). Moody’s expects a “consistent” rise in NPLs among Italian banks over the next 12-18 months. This anticipated increase is primarily attributed to the expiration of government-imposed loan moratoriums, which were introduced as a response to the economic impact of the COVID-19 pandemic. The moratoriums, extended by the Italian government until December 2021, have temporarily eased the financial burden on borrowers, but their expiration is likely to lead to a deterioration in the quality of bank assets.
Fabio Iannò, a senior credit officer at Moody’s, notes that this increase in NPLs is expected despite the recent improvement in the quality of banking sector loans. Italian banks have actively managed their risk exposure by selling or securitizing around 40 billion euros of troubled loans in the previous year, an increase from 34 billion euros in 2019. This strategy has helped reduce the proportion of deteriorated loans from a peak of 17% in 2015 to 4.1% by December 2020.
In summary, while Moody’s upgrade of the Italian banking sector’s outlook reflects a positive trend, the looming increase in NPLs poses a significant challenge. The end of the loan moratorium is expected to reveal the true extent of the pandemic’s impact on borrowers’ ability to repay loans, thus affecting the quality of bank assets. This situation requires close monitoring and proactive risk management by Italian banks to mitigate the potential adverse effects on their financial stability.
Blogger and Investment Management Advisor with focus on Distressed Assets & NPL. Massimo is Chief NPL & Fintech Editor at Credit Village Magazine.