Italian Banks: Good Underlying Performance in Q1 but Risks From Russia's Invasion of Ukraine Remain

DBRS Morningstar has released a commentary discussing large Italian banks’ Q1 2022 earnings, covering UniCredit, Intesa Sanpaolo, Banco BPM, Banca MPS and BPER.

Summary highlights from the commentary include:

• Italian banks reported an aggregate net profit of EUR 1.6 billion in Q1 2022, down 48% compared to Q1 2021, mainly due to higher loan loss provisions (LLPs) attributable to risks connected with Russia's invasion of Ukraine, as well as worsened macroeconomic expectations due to the conflict. Excluding Russia/Ukraine-related LLPs, net profit would have been up 4% YoY in Q1 2022.

• In Q1, revenues were supported by higher volumes and business activities in the context of a gradual recovery in the economy from the pandemic, despite heightened volatility and uncertainty from the current geopolitical tensions. Italian banks are well positioned to take advantage of any potential hike in interest rates starting in H2 2022, and the benefit increases when rates reach positive territory.

• While slightly up compared to FY 2021, the average annualised cost of risk in Q1 2022 remained below the level in FY 2019 and FY 2020. The reported cost of risk, i.e. including the impact from the conflict, might differ considerably from the longer term cost of risk, although this depends on the evolution of geopolitical tensions and resulting indirect implications for European economies.

• Assuming that the pandemic remains under control, we believe that part of the outstanding generic provisions previously booked due to COVID-19, might be used to cover risks connected with Russia and Ukraine.

“Deterioration in asset quality following the expiry of moratorium remained contained in Q1 2022 and de-risking continued. We expect Italian banks to withstand the negative impact from their direct exposures to Russia and Ukraine, considering that the exposure is concentrated in the largest and well capitalised banks which also have a good level of business diversification. The indirect implications remain difficult to assess at this stage, however some pressure on asset quality might arise in the medium to long term as a result of high and persistent inflationary pressure, rising energy prices and disruptions in supply chains” said Andrea Costanzo, Vice President from the DBRS Morningstar Global Financial Institutions team.