Dagong Europe sees positive steps in Italian banks but calls for focus on weaknesses

Dagong Europe, the European branch of the China-based Dagong Global Credit Rating, on Monday said it saw an improving market environment for Italian banks which, however, should continue to focus on their key weaknesses.

The agency said in recent months there have been a series of positive regulatory initiatives in the Italian banking system.

"The Italian government is discussing the establishment of a bad bank for Italian banks' problematic assets, which should improve asset-quality indicators that are among the weakest within Europe," Dagong Europe said in a report.

Successful approval of a law on the voting rights of co-operative banks could help speed up consolidation efforts among the weaker players in the Italian banking system, the report added.

An agreement signed in March on limitations on "charitable foundation" shareholdings in assets, particularly banks, could also have a positive impact on banks' envisioned capital increases, the ratings agency said.

Finally, the European Central Bank (ECB) took over regulatory oversight of 128 euro-area banks in November last year. "In our view, European banks will continue to benefit from more harmonized supervisory actions and decisions," the report said.

As confirmed by the International Monetary Fund (IMF)'s report in September, Italy is emerging slowly from recession, Dagong Europe noted.

"While credit demand from the real economy remains low for the time being, the improving economic forecasts allow us to expect a cautious pick-up in lending by the end of 2015," the report said.

Yet, Dagong Europe believes Italian banks may also find it difficult to adapt to a changing market environment with new challenges, characterized by slow economic recovery, low inflation and low or negative interest rates.

While some core European countries have been used to a low interest rate and low inflationary environment, Italian banks and those in other peripheral countries have not faced this scenario for decades, the ratings agency noted.

"In our view, despite the improving credit environment, the Italian banking system should not abate from continuing to focus on its key weaknesses," Dagong Europe highlighted in the report.

"It should build up capital in view of expected growth and upcoming regulatory standards, improve efficiency through better customer service, focus on expected new lending with better asset quality and prevent concentration, and explore and test new funding alternatives," it added. Enditem