Financial stability report released. For Italy, the risks on public finances are moderate, even if medium-term vulnerabilities persist which, however, can be addressed through effective implementation of the NRP. Household wealth rises but in a non-homogeneous way, business balance sheets improve
The global economy continues to benefit the effects of the vaccination campaign and the expansionary policies of the monetary and fiscal authorities but, in recent months, signs of a slowdown have emerged. The rigidity of supply, coupled with the increase in the price of raw materials and energy products, are causing more persistent than expected price pressures. This is what we read in the Financial Stability Report of the Bank of Italy.
On the basis of what is currently assessable, the institute of via Nazionale indicates, the effects on long-term inflation expectations have so far been minor. On the financial markets, the sovereign spreads of some euro area countries recorded a marked increase between the end of October and the beginning of November in connection with fears of a possible reduction in monetary accommodation.
Italy – In our country, they explain from via Nazionale, financial stability risks are moderate and medium-term vulnerabilities persist, linked above all with the possibility that economic growth, currently solid, will lose intensity. These vulnerabilities can be addressed through effective implementation of the NRP, which also ensures a path of significant and lasting reduction in the ratio between public debt and output.
In addition, the Bank of Italy points out, the Eurosystem’s public and private bond purchase programs contribute to maintaining smooth financing conditions on the markets, including in the government bond sector. Spreads on private bonds remain at historically low levels, both in the investment grade and high yield segments. The gradual reduction in corporate insolvency rates, made possible by the good performance of the economy, mitigates the risk of sharp falls in bond prices.
Families and businesses – The cyclical improvement and support measures have resulted in an overall growth in savings and financial wealth, although not homogeneous among the different categories of households, and the risks associated with the financial situation remain limited overall. The debt of households, continues the institute of via Nazionale, is in moderate increase, but it remains low in international comparison. The ability to repay loans is good, also thanks to low interest rates and the share of debt held by financially vulnerable households is relatively low. As for the businesses, the recovery of profitability, the abundant liquidity accumulated during the period of the pandemic and the favorable conditions of access to credit contribute to a significant improvement in balance sheets. Thanks to the solid recovery of the economy, the gradual reduction of public support measures is taking place without inducing tensions. This was supported by the Bank of Italy in its Financial Stability Report. Risks, the document indicates, could derive from a less favorable evolution of the economic situation and profitability of companies than is currently expected. Furthermore, the Bank of Italy continues, in the first half of 2021 financial leverage, measured by the ratio between financial debts and the sum of the same with shareholders’ equity, was slightly reduced, to 39.9%, however, remains 1.3 percentage points higher than the start of the pandemic. In the main European economies, the trend in leverage since the end of 2019 has been heterogeneous: in all countries, debt has contributed to its growth; the contribution of the market value of the assets was instead differentiated. Looking ahead, the Italian companies interviewed in the economic survey expect a reduction in leverage by the end of the year.
Banks – The measures implemented by the government to support families and businesses and the economic recovery helped to mitigate the effects of the pandemic on the quality of bank assets. The deterioration rate of loans is stable at historically low levels and the disposals of non-performing loans continue. Nonetheless, the via Nazionale institute warns, performing loans subject to concession measures (forborne exposures) increased, especially among borrowers who benefited from moratoriums. According to Bank of Italy, it is “It is important that banks pay particular attention to assessing the repayment capacity of borrowers and the consequent provisioning decisions “. Looking ahead, the document continues, a vulnerability factor for intermediaries may derive from the growing digitalization of financial services and the greater use of outsourcing of activities, which increase exposure to cyber risks and those for business continuity. “The awareness of these new risks on the part of intermediaries as well as their integration into the governance and control systems are essential for effective counteraction”, explain from via Nazionale.
On the front of the profitability banking, this it improved significantly in the first half of the year, mainly due to the decline in loan loss provisions. Other contributing factors, such as trading income, are of a temporary nature and may not extend to the second half of 2021. Furthermore, we read, the capitalization has been slightly reduced, above all due to the disappearance of the transitional prudential treatment associated with the ” adoption of the IFRS 9 accounting standard. According to via Nazionale, the capitalization should be slightly affected by the resumption of payment of dividends following the expiry of the recommendations issued by the supervisors, who had placed limits on their distribution during the health emergency.
Insurance – The insurance sector has returned to pre-pandemic conditions. In the first half of 2021, the average solvency ratio of companies increased further. Profitability and premium income increased thanks to the good performance of the life sector. The sector, specifies the institute in via Nazionale, has recovered the previous conditions “in terms of capitalization, profitability and premium income”.