Loan growth – Italian banking system
Large earnings downgrades, capital the silver lining?
We stay cautious given (i) structural uncertainty about the real damage inflicted on the economy, (ii) elevated earnings sensitivity to small cost of risk (CoR) changes (-10-60% EPS for 10bps), (iii) concerns about the country's accelerated sovereign debt increase, and (iv) lack of clear valuation support.
Fees/LLPs main P&L drags, Targeted Longer-term Refinancing Operations (TLTRO) and government guarantee the offsets
Reversing 2H19 support, fees are the most vulnerable line in 2020E, both due to a c30% market decline driving AuM fees sharply lower and lockdowns halting transactional activity. As in Spain, however, LLPs are the main structural risk, with our estimates including 2-3% NPL inflows (95-115bps CoR) in 20E and 1.5-2.0% in 21E (60-95bps), consistent with our economists' view about a recovery in 2H, and qualitatively incorporating the large loss protection implied in the government's guarantee scheme. Likely increase of TLTRO borrowing and Treasury income reliance offers upside risk in NII terms.
Capital not a source of concern, but return stories tougher to play out
Especially after the ECB-driven dividend cancellation, Italian banks enter the COVID-19 downturn with strong solvency ratios (13.0-15.5% CET1), a key difference vs. previous downturns in our view. Stress required in non-performing loans (NPL) and CoR terms to bring CET1 levels below acceptable levels (11%) materially exceeds figures seen in GFC/sovereign crises.