(Bloomberg) -- Profitability at Italian banks is expected to be higher than for European peers, as years of cost-cutting and balance sheet clean-ups bear fruit amid stable sovereign bond spreads and resilient lending income, S&P Global Ratings said.

The weighted average return on equity for rated Italian lenders is seen reaching around 14% in 2024, compared to about 13% for UK banks and 6% for German peers, according to an S&P report. 

Italy’s banking industry is “stronger and better equipped to face adverse scenarios, thanks to improvements in costs and risks achieved in recent years,” Mirko Sanna, S&P lead analyst for financial institutions, said at a news conference Wednesday. 

“Italian banks are less exposed to credit risk at a structural level after they have massively cut non-performing loans,” Sanna said, and they’ve “reduced costs minimizing the impact of inflation and brought efficiency in line with European peers.”

Since the European Central Bank took on supervision of the region’s lenders, Italian banks have implemented years of painful restructuring to cut bad loans and reduce costs and risks. Banks last year benefited significantly from the European Central Bank’s campaign of inflation-fighting rate hikes, and the resulting surge in net interest income has enabled lenders to boost profit and returns to investors.

“We expect net interest income of Italian banks to remain sound in 2024, although slightly down compared to the 2023 peak, and then to decrease more substantially in 2025,” Sanna said. “Differences in Italian banks will start showing up in 2024 and 2025 as the ECB’s TLTRO will need to be substituted by other sources of financing.”

That development comes against a backdrop of “broadly stable” spreads between Italy’s 10-year bonds and their German benchmark as the ECB is seen likely to start cutting rates in June. 

“We see a 4.7% yield for Italian BTPs in 2024,” said Sylvain Broyer, S&P’s chief economist for the EMEA region. “The Italian banking sector is resilient and the housing market has weathered a rise in interest rates better than Germany.” 

S&P is due to issue its next rating update for Italy in April. 

 

©2024 Bloomberg L.P.