We expect the recovery to be moderate and driven by external demand, with consumption and investment likely to continue to stabilise. Risks, however, are still tilted on the downside.
Households’ financial position remains sound despite the 2% drop in gross disposable income last year, with low leverage compared to peers. Barring any sharp decrease in house prices (which we do not forecast in our baseline scenario), the credit risk from households is mitigated by their positive net wealth position.
Italian corporates remain vulnerable to profit and interest rate shocks. On the funding side, large corporations have increased their access to capital markets. We expect the liquidation of state arrears to ease financial conditions for corporates and SMEs.
Italian banks’ asset quality is worsening but the pace of inflows in non-performing loans is slowing. Coverage ratios are stable. Harmonisation of the definition of non-performing exposures and forbearance will align Europe with the stricter Italian criteria.
Italian banks’ core capital levels continue to improve. But challenges remain including meeting new Basel 3 capital requirements and the AQR and stress tests in 2014. There is much uncertainty still around the outcome of these tests including any potential capital shortfalls, which in our view will cap performance of Italian bank spreads. Profitability is only modest and other capital raising options will likely be required in order to avoid shortfalls.
The liquidity position of Italian banks has continued to improve in 2013, both in the funding gap and in the net liquidity position. However, as the FSR points out, Eurosystem financing is still an important factor for the liquidity of the system.
Taking a precautionary approach, Italian banks have so far repaid only 15% of their 3y LTROs borrowings, lower than Spanish banks. However, the payback has picked up speed over the last couple of months and we expect it to continue.
Italian banks’ holdings of general government securities have continued to increase (despite some net disposal in Q3 13), reaching 10% of total assets. This also represents the bulk of the ECB-eligible collateral buffer, which is quite ample as it stands at about €334bn, net of haircuts.