Financial Stability Report November 2013 London - 22 November 2013
Outline of the Presentation o Overview of main risks o The financial condition of firms and households o The real-estate market o The banking system
Overview of Main Risks Main risks for financial stability (EA, Italy): Trend o economic outlook o uncertainty on sovereign debt o financial fragmentation o credit risk in the banking sector
The Financial Condition of Firms Industrial production and confidence oleading indicators consistent with cyclical upturn oconfidence is rising, IP is stabilizing. Positive growth forecast for 2014 and 2015 Debt and leverage of non-financial firms (%) ofirm profitability is still low, affected by recession. Lending conditions are still tight ofinancial debt is falling. The increase of leverage has ended ooverall, outlook improving, but risks remain sizeable
The Financial Condition of Firms (2) Survey question: DOES THE COMPANY EXPECTS A SOLID IMPROVEMENT OF PRODUCTION IN THE COMING MONTHS? NO YES TOTAL PAYMENTS FROM GENERAL GOVERNMENT FOR ARREARS (%) Firm is not a creditor 66 34 100 Firm is a creditor, and: - did not receive any advance payments 69 31 100 - received advance payments 62 38 100 o Firm confidence is benefiting from the payment of general government arrears ( 27bn in 2013, 20bn 2014); 14bn disbursed up to October 2013 o Up to now, funds have been used mainly to reimburse commercial and bank debt
Households Financial Conditions 180 150 120 90 60 30 0 Financial debt / disposable income (%) Mortgage loans Consumer credit Other loans dic 07 dic 10 giu 13 dic 07 dic 10 giu 13 dic 07 dic 10 giu 13 dic 07 dic 10 giu 13 dic 07 dic 10 giu 13 dic 07 dic 10 giu 13 dic 07 dic 10 giu 13 italy France Germany Spain Euro Area United Kingdom United States Financial assets / disposable Income 180 150 120 90 60 30 0 o Italian households have sound financial conditions: o Debt/disposable income ratio is low; debt is declining. o Only 25% of households have financial debt. Share of financially vulnerable households is low (3% of total in 2013 and 2014) o Financial wealth is high o Main risks derive from weak income growth
Italy s Property Market: Weak but Stabilizing House prices in Europe (2000=100) o Italy has not experienced a housing bubble. Price dynamics consistent with fundamentals 2 1 0-1 -2 Italy: residential property house prices (q-o-q % changes) number of transactions (right-hand scale; index: 2005=100) 90 80 70 60 50 o Property mkt still weak, but with signs of stabilization o No. of transaction stabilized for both residential and non residential property o In Q2 the fall in house prices eased (0.6% qoq) -3 2011 2012 2013 40
Banks Key Problem: Rising Credit Risk 21 19 17 15 13 11 9 7 5 3 40 30 20 10 NPLs and bad loans of Italian banks (% of loans) NPLs Bad loans 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 Profitability and Provisions of Italian Banks (billion euros) Operating Profits Provisions and Net Value Adjustments for Loan Impairment 2008 2009 2010 2011 2012 o Credit quality is deteriorating, driven by loans to non-financial corporations (NFCs). HHs more resilient o Gross (operating) profits have resumed growth in 2012 (but 2013 results likely affected by low rates) o Net profitability is low o Gross operating profits sufficient to cover loan loss provisions in 2013 and 2014
Banks Key Problem: Rising Credit Risk (2) New NPLs of non financial firms (% of loans) New NPL rate New bad loan rate o The flow of new NPL and of bad loans to non financial companies are showing signs of a turnaround
Italy s Classification Standards Are Rigorous 14 12 10 8 6 4 2 0 NPL ratio of Italian banks (% of loans) Coverage ratio of Italian banks (% of NPLs) 60 50 Accounting and supervisory standards of Italian banks December 2012 December 2012 Accounting and supervisory standards of large European banks o Italian banks follow prudent supervisory standards o If Italian banks followed the standards used in other jurisdictions (e.g. excluding fully-collateralized NPLs) then: othe NPL ratio would be 1/3 lower ocoverage ratios would be higher by 20 pct. points 40 30 20 10 Accounting and supervisory standards of Italian banks Accounting and supervisory standards of large European banks onpl definition proposed by EBA is in line with (or less comprehensive than) Italy s definition 0
Stock of NPLs Will Have to Be Reduced o Market for assets securitization very thin. Price differential between supply and demand of NPL large but likely to narrow: o The Bank of Italy s recent action on value adjustments o Reduced financial market fragmentation (economic recovery, SSM comprehensive assessment) o The Stability Bill for 2014 provisions on tax treatment of loan losses and value adjustments
Banks Holding of Sovereign Bonds Purchases of sovereign bonds by Italian banks bn Italian sovereign bonds of non-residents bn o Large purchases of domestic sovereigns over 2 years a. ample differential sov s vs loans b. precautionary demand c. fragmentation o In last 3 months sov. portfolio shrank ( 10bn), due to improvement in (a), (b), (c) o Sov. mkt conditions improving. Not just rates and spreads: foreign holdings are increasing
The Funding Gap is Low Growth in bank funding: contributions (percentage points; 12-month changes) ototal funding is contracting (in part as a result of banks choices) 25,0 20,0 15,0 10,0 Retail funding and funding gap Funding Gap (% of loans) othe funding gap has narrowed to very low levels 5,0 Retail Funding (12-month pct growth) 0,0-5,0 2008 2009 2010 2011 2013
Liquidity Conditions and Eurosystem Borrowing Availability of Collateral for Italian banks 302 bn. 334 bn. o Available eligible assets continue to increase o Dependence on ECB funding significant but falling o banks (especially large ones) have regained access to wholesale markets o Overall liquidity position is satisfactory o Risks: sovereign downgrade, dysfunctional wholesale mkts o Ongoing work to make revolving loans (an Italian feature) and pools of loans pledgeable
Capital Positions Continue to Strengthen 17% 15% 13% 11% 9% 7% 5% Top 5 Banking Groups Total Capital Ratio Core Tier 1 2008 2009 2010 2011 2012 2013 (June) 13% 11% 9% Other Banks Total Capital Ratio Core Tier 1 2008 2009 2010 2011 2012 2013 (June) o Capital ratios have increased continuously since 2008, as a result of both capital issues and lower RWAs Bank capital injections by the public sector in selected countries ( bn) Italy: 0,3% of GDP o The amount of public funds injected into the banking system by the Italian State is low
Banks Leverage is Low Leverage: main European banking systems (December 2012) oleverage (total assets/ tier 1 capital) remains low 6,0 5,0 4,0 European banks level 3 assets (%) Lev. 3 assets/ tot. system assets Lev. 3 assets/ tot. sample assets Lev. 3 assets/ RWA sample (mkt) (right axis) 100 90 80 70 60 olevel 3 assets are negligible 3,0 50 2,0 40 30 1,0 20 10 0,0 Italy Germany France Belgium Netherlands Total 0
Capital Needs: the FSAP of the IMF Scenarios IMF FSAP estimates of cumulated capital shortfall (billion euros) # of failing banks CET 1 T 1 capital shortfall # of failing banks capital shortfall bn % of GDP bn % of GDP Baseline (at end-2017) 5 1.0 0.1 10 3.4 0.2 Low growth (at end-2017) 11 4.9 0.3 15 10.2 0.7 Adverse (at end-2015) 13 6.0 0.4 20 13.8 0.9 Capital benchmark: Basel 3 phasing in for both CET1 and T1. o IMF (FSAP, Sept. 2013): 32 banks, individual data: o capital need in stressed conditions bn. 6.0-13.8 (0.4-0.9% GDP) o shortfalls mainly in small-medium local banks o Estimates of private analysts: based on heterogeneous hypotheses and methodologies, but results are of similar magnitude
Summary Assessment & Outlook o The Italian banking system has shown strong resilience in the face of an exceptional economic crisis o A successful, gradual exit from currently stressed condition is possible o SSM and BSA will enhance transparency. They are not a further problem. They are part of the solution
Summary Assessment & Outlook o Economic recovery after a double dip recession is the critical success factor for Italian banks. It is a precondition to start reduction of the stock of nonperforming loans and to restore profitability o Expectations for key ECB interest rates to remain low for as long as necessary provide support to recovery o Continuing national efforts at reform of the economy and consolidation of public finances are key
Thank you!