Weekly SmartPills #42

A GOLDEN YEAR FOR ITALIAN BANKS

2023 marked a period of extraordinary success for Italian banks, with some of the main institutions reporting unprecedented operating results in the fourth quarter. Intesa Sanpaolo, Unicredit, and Banco BPM, the three giants of the sector, exceeded expectations, recording sharply rising net profits: €7.7 billion (+76% compared to 2022) for Intesa; €8.6 billion (+50%) for Unicredit; and €1.26 billion (+85%) for Banco BPM.

The success of Italian banks in 2023 can largely be attributed to the monetary policy of the European Central Bank (ECB). The higher interest rates decided by the ECB had both positive and negative effects on banks. When the ECB raises rates, banks tend to also increase the interest on loans to customers, such as mortgages, while the interest on deposits grows at a slower pace. This difference, known as "windfall profit," contributed to the increase in bank earnings.

The Proposal to Tax Windfall Profits

In 2023, the Meloni government proposed to tax the extra profits of banks resulting from the rate hikes decided by the ECB, following Mario Draghi's proposal concerning energy companies in relation to the war in Ukraine.
The proposal caused concern in the markets and received a cool reaction from the Italian Banking Association (ABI).
Subsequently, the regulation was amended: banks have the option to either pay the tax or use the amount to strengthen their capital, thus making the banks more solid.

The exceptional year of Italian banks in 2023 highlighted their resilience and ability to adapt in a constantly evolving economic environment. Despite challenges and uncertainties related to monetary policy, competition, and regulatory changes, banks were able to take advantage of the opportunities offered by the context to generate record profits and ensure greater financial stability.
The ability of financial institutions to successfully manage challenges and capitalize on emerging opportunities is evidence of their robustness and importance in the Italian economic fabric.

Toward a Sustainable Future for the Banking Sector

Looking ahead, Italian banks must focus on building a more sustainable and resilient banking sector.
This implies not only the prudent management of financial risks but also a commitment to innovation, digitalization, and environmental and social sustainability.
Banks must continue to invest in cutting-edge technologies and develop innovative financial solutions that meet customer needs and contribute to sustainable economic growth.
Moreover, it is essential that financial institutions work in collaboration with regulators and supervisory authorities to develop policies and regulations that promote a stable, transparent, and responsible banking environment.
Only through a collective commitment to sustainability and innovation can Italian banks continue to thrive and play a significant role in the economic and social development of the country.