The Italian banking system has showed an appreciable degree of stability since the outbreak of the economic crisis, but needs to stimulate its declining profitability, local experts said here on Wednesday.
The Italian banking system has proved to be among the soundest at the onset of the global crisis, Donato Masciandaro, an economics professor at Bocconi University in Milan said.
Only a few banks in Italy had to ask for state-guaranteed bonds and they were for small amounts, but as the crisis continues and the end of the tunnel is yet to be seen, the system could begin to falter.
"A banking system which is not able to produce profitability is a system we have to wonder about," Masciandaro said presenting a report on the Italian financial system from the Rosselli Foundation think tank at the Milan Foreign Press Association.
The Italian banking system is typically retail-oriented and concentrates on traditional intermediation, and its size, measured by the ratio of total assets to the GDP, is still significantly below the European average.
These were the main reasons why, at the beginning of the financial crisis, the Italian banks appeared to be better off than most others, which were heavily exposed to "toxic assets" whose value deteriorated rapidly.
However, the evolution of the crisis has changed the landscape and today the long-term decline in profitability of the traditional intermediation business seems to be the "Achille's heel" of the Italian banking system, the report pointed out.
In particular, as the country fell victim to the debt crisis, in 2011 Italian banks recorded significant losses on the trading portfolio of government bonds and a significant increase of their funding costs. The net effect was that both net interest income and net income sharply declined in comparison to the previous year.
In 2012, profitability fell by 80 percent to 1 billion euros (1.3 billion U.S. dollars) and the negative trend is expected to continue in the medium term.
Even in the favorable scenario of a quick solution to the European crisis, there will be no room for a significant boost to future profitability in terms of net interest margin, noted Giampio Bracchi, a professor of information systems at Politecnico di Milano University.
Therefore, if Italian banks want to increase their profitability, which, the report said, will be the "main challenge" of the country's banking system in the coming years, they must concentrate on the items below net income -- namely operating costs and provisions.
Bracchi said Italian banks are especially burdened by labor and structural costs linking to the branch network that are higher than those in other countries.
"The productivity of Italian banks is inferior by 40 percent compared to the European average. In Italy there are as many as 32,000 branches that should be reduced by around 25 percent," he told journalists at the Milan Foreign Press Association.
Bracchi also added that a natural way to facilitate this process is to rely on increased use of information and communication technology (ICT), since this would allow a reduction in operational costs and help exploit several distributional tools in a more efficient way.
According to the report, the European project of a banking union will help improve the effectiveness of bank regulation and supervision, which requires that national authorities conform to the European Central Bank (ECB) regulations by adapting their policies to an homogeneous model.