Italian Economy and Banking System
Luigi Di Martino
Fabrizio Honisch
UBI Banca
Research Department
Topics
Part I -
Italian Economy
 General Overview
 GDP Evolution and Prospects
 Main Strenghts and Weaknesses
 Final Remarks and Conclusions
Part II -
Italian Banking System
 Italian Banking total assets
 The General Framework
 Lending and Funding
 Capital Ratios
 Final Remarks and Conclusion
2
Gross Domestic Product (GDP): an international overview
3
Eurozone vs World: population and GDP contribution
4
Gross Domestic Product (GDP): an international comparison in Euro
2013 GDP per capita of Lombardy = 33.9k € and Piedmont = 28.5k €
(Est. Prometeia)
5
Italy: prospects of slow recovery of Italian GDP thanks to foreign
trade and the moderate recovery in domestic demand
Italian GDP should continue to benefit from the positive trend of
foreign trade, as well as a slight improvement in domestic demand.
Factors supporting the economy in 2014 could come from:
 the very accommodating monetary policy;
 the process of normalization of financial markets conditions;
 the gradual strengthening of foreign demand which reflects
the expansion of the global economy;
 the recovery of business and consumers confidence in Italy.
6
Italy: improvement of the Italian trade balance in relation both to EU
partners and to countries outside the EU
7
Italian exports have returned to pre-crisis levels thanks to the
dynamics of trade with countries outside the EU
8
Contribution of Italian manufactured products world exports
2nd in EU
3rd in EU
Within European Union, Italy is the 2nd largest
country by contribution of manufactured products
world exports to country GDP and 3rd by market
share in manufactured products world exports.
9
Italy: progressive improvement in business confidence.
Is a moderate upturn in industrial production starting?
10
Italy: the development of the Purchasing Managers Index could
confirm the possible recovery in industrial output
11
The rebound of consumer confidence index recorded in 2013 could
anticipate a slow recovery in household spending
12
Italy vs Euro : gross saving rate evolution
 In the recent quarters, the Italian households rate of savings – both
manufacturing and consumer households – has grown shrinking
the gap vs Eurozone recorded during the crisis.
 Savings increase, associated with the improvement in confidence,
could anticipate a rise in consumption at a moderate pace.
13
Italy is characterized by a low level of Private Debt
14
Italy: households net wealth represents about 4.3 times Public Debt
Source: Eurostat and Bank of Italy
15
8542
Households net wealth in Italy: one of the highest in the world
 2011 Households’ Net Wealth: an international Comparison
(Households’ Net Wealth on Disposable Income)
(X)
9
8.1
7.9
8.3
8
6.3
7
6
5
5.2
3.0
2.0
3.2
2
1
2.4
2.2
4
3
5.8
2.1
2.0
4.3
3.6
6.0
5.5
5.3
0
USA
Canada
Germany
Real Assets
Source: Bank of Italy, “Household Wealth in Italy”, December 2013
16
Italy
France
Net financial assets
UK
Forecasts on Italian GDP (% change YoY)
17
Primary Balance, Public Deficit & Debt: an international comparison
18
Long average residual maturity of Italian Public Debt
Source: Bloomberg, elaborations by UBI Research Department
19
Italy: Primary Balance, Public Deficit & Debt
20
Italy has an important amount of State Assets to dispose
Administration
Estimated market value (bln/€) Actual yield
State
185
Real estate
72
0.1%
6.0%
Equity interests
63
5.4%
7.4%
Concessions/franchises
50
0.5%
6.3%
Regions and local entities
386
Real estate
349
0.5%
6.0%
Equity interests
17
3.0%
4.0%
Concessions/franchises
20
0.5%
6.0%
Total public administration
571
0.9%
5.7%
Source: MEF, Relazione sulle Privatizzazioni, September 2011
21
Target yield
Italy: low productivity
22
Italy: shadow economy as a percentage of official GDP
23
Main advanced countries comparison (ranking from 1 to 185):
the legal framework impact on the ease of doing business
2014
Paese
Country
France
Germany
Italy
Spain
Japan
United Kingdom
United States
38
21
65
52
27
10
4
41
111
90
142
120
28
20
92
12
112
98
91
27
34
42
3
89
62
26
74
13
Registering
Property
149
81
34
60
66
68
25
Getting Credit
55
28
109
55
28
1
3
Protecting
Investors
80
98
52
98
16
10
6
Paying Taxes
52
89
138
67
140
14
64
Trading Across
Borders
36
14
56
32
23
16
22
Enforcing
Contracts
7
5
103
59
36
56
11
Resolving
Insolvency
46
13
33
22
1
7
17
Ease of Doing
Business Rank
Starting a
Business
Dealing with
Construction
Permits
Getting
Ranking by category
Electricity
Source: Doing Business 2014 - World Bank Survey
24
Italy: main strengths and weaknesses
 Within EU: 2nd by manufactured
products exports contribution to
country GDP and 3rd by world exports
market share
 Households net wealth = about 4.3
times public debt and one of the highest
in the world
 Low private debt
* Source: Eurostat. Q4 2013 Labour productivity per hour worked
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 Low productivity* (€32.2 vs. €43.0 in
Germany, €45.9 in France and €31.9 in
Spain)
 High public debt (even if it is mostly
owned by residents)
 Slow and complex legal system
Italian Economy: final remarks and conclusions
 World economic growth is continuing its course in 2014 and also Italy should return to expand even if at a moderate pace.
 The recovery in our country is still fragile and the pace of expansion should be lower than the Eurozone. However, the
economic outlook shows several signs of improvement from the qualitative and, partially, quantitative point of view.
 Positive factors
 Favourable international context, which is giving a positive contribution to net exports.
 Easing conditions in terms of monetary policy and progressive improvement of the financial markets.
 Recovery and strengthening of both business and consumer sentiment.
 Financial soundness of Italian households vs European, that could support the slight recovery in domestic demand.
 Risk factors
 The pace of growth will remain modest and lower than the rest of Euro area for several years because of structural
problems whose solution will require a very long time (e.g., weak dynamics of productivity, high tax burden, ...).
 During the crisis in Italy there has been a substantial loss of productive capacity due to cessations of business,
outsourcing and relocation of production abroad by firms.
 In order to respect EU rules, there are prospective risks of correction measures on public accounts in the next
years mainly based on “optimistic" estimates about domestic growth.
 Possible slowdown of foreign trade contribution to GDP caused by a potential moderation in the pace of growth in
emerging economies, as well as geopolitical tensions. In this sense, there could be a decline in demand for our
exports and/or an increase in the price of raw materials.
 The Italian labour market is expected to remain weak for a long term, with obvious negative effects on the growth
rate of households consumption expenditure.
 On the investments side, Italy continues to be considered not very favourable to carry out business activities and,
consequently, to attract foreign investors, also according to the “Doing Business” survey of World Bank and the
dynamics of foreign direct investments in recent years.
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Italian Banking System vs European Union countries
 Italian Banking System is one of the widest within Europe 27 in
terms of total assets.
 It counts more than euro 4 thousands billions.
 It’s the forth behind United Kingdom, Germany and France.
 During the last few years it’s decreasing, but at a lower pace
respect to the most of the other European peers.
27
Ranking by total assets
Source: ECB, Bloomberg, elaborations by UBI Banca Research Department
28
One year change in total assets
Source: ECB, Bloomberg, elaborations by UBI Banca Research Department
29
... and since 31/12/2006
Source: ECB, Bloomberg, elaborations by UBI Banca Research Department
30
Evolution of italian banks total asset (31/12/2006=100)
Source: ECB, Bloomberg, elaborations by UBI Banca Research Department
31
Total asset and GDP
2013
Median = 2.7
Average = 3.4
Average (-Lux) =2.7
2006
Median = 2.5
Average = 3.6
Average (-Lux) =2.6
1.9 in 2006
Source: ECB, Eurostat, Bloomberg, elaborations by UBI Banca Research Department
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The main framework
 Italian Banking System is composed by 694 financial institutions
at the end of 2013 (36 less respect to the end of 2012).
 It totalize more than 35 thousands branches with a reduction of
more than 700 units since 2007
 More than 30 thousands persons are employed in Italian banks.
 There’re about 1850 persons for each branch, much less than in
other European countries.
33
Inhabitants per branch at the end of 2012 and 2007
Source: ECB, Bloomberg, elaborations by UBI Banca Research Department
34
Distribution channels
90% credit and debit
card user
2013
11% phone banking
87% branches
89%
traditional
channels
85% self service
zone
10%
79%
65% in 2005
7% financial
advisors
Source: Italian Banking Association (ABI) and GfK Eurisko
35
89% other
channels
10%
48% home / internet
banking
11% mobile banking
Lending activity to households and non financial corporations
 Total lending to Italian households and non financial corporations
reached a level of about euro 1.4 trillion at the end of march.
 The actual amount is below to the pre crisis level still. The
contraction between December 2010 and March 2014 is about 2%.
 Still, in the most recent months underline a gradual improvement
of lending activity, in line with an improved economic environment.
36
Households and non financial corporations total lending (12/2010=100)
Source: ECB, elaborations by UBI Banca Research Department
37
Lending activity to households based on destination
 60% of lending to households is loans to house purchase and
10% is consumer credit.
 These percentages have changed just a little bit since the last
recession. In particular, consumer credit collapsed during the
2012 -2013 period and lost ground respect to loans to house
purchase, while others loans had been confirmed as a 30% of
total lending.
 The three categories are below the last year level, even if the
contraction is less deep.
 The last ABI report underlines a 20% YoY increase in new
mortgages in the first quarter of 2014.
38
Lending to households (% change YoY)
... and it’s
still weak
consumer credit
collapsed during the
last recession ...
Source: ECB, elaborations by UBI Banca Research Department
39
Lending to households based on destination
Source: ECB, elaborations by UBI Banca Research Department
40
Lending to non financial corporations / households (%YoY)
Source: ECB, elaborations by UBI Banca research department
41
Credit quality
 The non performing loans increased a lot in the last five years.
In the last quarter of 2008 they represented the 2.5% of total
loans to customers. In the same period of 2013 are the 9.2%.
Source: Bank of Italy, elaborations by UBI Banca Research Department
42
Funding
 Direct funding from retail customers totals 1.7 trillion at the end
of April. Deposits are the 70% of total. Three years ago the
share was 65%, both for the decreasing of bonds and for the
increasing of deposits.
 This trend hasn’t changed in the first four months of 2014:
bonds lost 2.2%, deposits gained 0.8%.
 The funds from European Central Bank are decreasing in line
with the improving condition of markets sentiment on non core
sovereign debts and actually they’re about 200 billion of euro.
43
Direct funding from retail customers composition
The share of deposits is
constantly increasing
Source: Italian Banking Association (ABI), elaborations by UBI Banca Research Department
44
Direct funding from retail customers dynamic (31/12/2010=100)
Declining in bond
amount started in the
second quarter of 2011
and it’s not over yet
Source: Italian Banking Association (ABI), elaborations by UBI Banca Research Department
45
Borrowing at ECB by main and long term refinancing operations …
Source: ECB, Bloomberg, elaborations by UBI Banca Research Department
46
… refinancing operations and total asset ratio
Source: ECB, Bloomberg, elaborations by UBI Banca Research Department
47
Spread between lending and funding rates
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
Apr
Apr
Apr
Apr
Apr
0.0%
Source: Italian Banking Association (ABI)
48
Apr – 13
May - 13
Jun – 13
Jul – 13
Aug –13
Sep – 13
Oct – 13
Nov – 13
Dec – 13
Jan – 14
Feb – 14
Mar – 14
Apr – 14
0.5%
– 08
– 09
– 10
– 11
– 12
The spread
between lending
and funding
rates tightened
about 1.5%
from 2008 and
2013.
Still, during the
last year it’s
widening again.
Tier I ratio and Total Capital Ratio
Italian banks in terms of
Tier I ratio are in line
with other Area euro
peers …
… as by Total Capital ratio.
Source: Italian Banking Association (ABI)
49
Italian Banking System: final remarks and conclusions
 Italian banking system is mostly composed by traditional and
domestic banks. It’s one of the biggest banking system in Europe.
 During the last crisis, it suffered both for lending and funding
activity. Balance sheet suffered the low spread between lending
and funding rates.
 Non performing loans are still weighting on banks balance sheet.
 Anyway, There is the sign of an improvement in lending activity
due to an increase in demand for loans.
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Disclaimer
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