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The observatory on Banking System Stability is produced on a quarterly basis collecting Italian and European macroeconomic and microeconomic data. The analysis focuses on three macroeconomic areas and their related indicators:
Capital adequacy: the regulatory capital composition, the RWA, capital ratios and capital adequacy indicators;
Asset quality: coverage ratios, cost of risk, average portfolio PD and LGD and IRB implicit risk weights, shortfall and expected loss;
Profitability: profit and loss account indicators, non-performing loan amounts and coverage ratios.
The most recent observatory release demonstrates the significant negative impact on profitability associated with the cost of risk. The observatory indicates that marginal adjustments to risk, liquidity and capital adequacy measurement models is no longer adequate and assists banks mobilise change programmes to significantly review and validate their suite of measurement models.
The objective of the observatory is to provide a continuous cycle of benchmarked analysis resulting in a higher availability of capital, improved asset quality and a reduction of risk and operational costs. Ultimately this will assist the banks with growth and result in improved credit availability in the economy, which remains an ongoing industry challenge despite signs of a recovery in the economy.
The new capital constraints imposed by Basel 3 until March 2019, together with the immediate demands from the European Banking Authority (“EBA”), have led to a significant change in capital ratios aimed at increasing banks quality of capital held: the core tier 1 ratio increased in aggregate for AIRB banks from 7.4% in 2009 to 11.2% in the first half 2013, with a constantly increasing trend exceeding the 9% level imposed by the EBA.
The asset quality of Italian banks is recording an increasingly worrying deterioration.
The latest system data for the month to September 2013 shows that gross non-performing loans amount to around 144.5bn Euro, 2.7bn more than the previous month and almost 27bn more than the same month in 2012. This amounts to a year on year increase of around 23%. Compared to the overall stock of loans, net of write-downs, bad loans are around 4%, a percentage point more than one year ago.
Due to the significant increase of the cost of the loans, the income of the banks is continuing to decrease, resulting in profitability indexes which are approaching zero. Across the banks reviewed, the return on equity actually decreased during the three year period from 2009-2012, from 3.7% to 0.3% for AIRB banks and from 3.8% to 2.1% for the main standardised banking groups.
The latest figures on the quarterly statements as of September 2013, confirm the profitability crisis of Italian banks: the twelve main listed banks reported a reduction in income of around 2 billion in the first three quarters of 2013.