The profitability of Italian banks has experienced a significant increase, placing them at the top of the European rankings alongside Portuguese banks, boasting a RoE of 13.6% in mid-2023. Only Swedish and British banks, outside the Eurozone, reported RoEs higher than their Italian counterparts (17.5% and 14.8%, respectively).
The leap in profit generation by banks, as indicated by a new analysis from Dbrs Morningstar, has been a European phenomenon, with the average European RoE rising from 7.7% to 11.1% between the end of June 2022 and the same month this year. Behind this success is the increase in interest rates, causing margins on loans to soar. However, for Italian banks, the growth in net interest margin, reaching almost 2%, has been less extensive compared to countries like Greece and Portugal (with interest margins exceeding 3%).
Dbrs explained that banks benefiting the most from interest rate hikes operate in markets where a significant percentage of loans are variable-rate (as in Greece and Portugal) and tend to retain a substantial portion of interest rate increases without passing them on substantially to depositors (a trend easily observed in Italy).
Challenges for Banks in 2024
Investors have long rewarded the stocks of Italian Peninsula banks. With a performance of 39% since the beginning of the year, the Italian banking sector index has far surpassed the results of the European Euro Stoxx Banks (+17.4%). The question is how robust the margins observed so far among European institutions can remain. According to Dbrs, the positive peak will be reached in the fourth quarter of this year, then some “contrary winds” will begin to be felt—though not uniformly across various European banking systems.
“We expect that the high level of interest rates will continue to support bank profits in 2024, especially in countries where loans are still in the repricing phase,” analysts said. However, “given the gradual recovery of deposit rates, an increasing number of banks indicate that net interest margins have peaked.”
Furthermore, the agency continued, “loan growth in Europe has slowed significantly,” reaching its euro area minimum since 2025. This will curb further margin growth for banks. “At the same time, factors such as rising interest rates and economic weakening could lead to an increase in loan losses and credit costs, while wage inflation continues to drive up expenses.” In Italy, category battles have already led to an upward adjustment to bank employee contracts. Regarding corporate debt, Dbrs warns especially about the risks of “companies with a high degree of financial leverage, often sponsored by private equity,” whose debt service capacity is decreasing in a context of higher interest rates.
Moreover, the increase in deposit remuneration in 2024 could have negative effects for banks that will exceed the benefits derived from higher mortgage and loan costs, the rating agency stated.
Despite these challenges, Dbrs does not see the conditions for severe deterioration in the banking sector in the coming year. “European banks’ capital levels are generally high,” analysts explained. “For 2024, we expect capital ratios to remain substantially stable, as we anticipate that earnings strength will continue, albeit at slightly lower levels than in 2023.”
Concerns about various tax tightening measures proposed or adopted in various European countries such as Spain, Greece, Portugal, the Netherlands, and Italy should not be too high. The Italian case is particularly emblematic, as the tax on extra profits has been almost completely converted into capital reserves for banks, with no revenue for public coffers.
In portfolio strategies for the last two months of the year, European fund managers maintain a slightly bullish position on the banking sector, considering that the majority of profit growth seems to be behind, as shown by the latest survey conducted by BofA.
