MDIBY Mediobanca Banca Di Credito Finanziario SPA (PK)

By Giovanni Legorano 

ROME -- Full-year results from Italy's largest banks reflect the deep wounds the country's financial system continues to suffer, showing how long the road to recovery is for Italian lenders.

In the past week, four of the country's largest banks posted a patchy set of numbers for the last three months of 2016.

This is the first set of results for major banks since the Italian government stepped in to bail out Banca Monte dei Paschi di Siena SpA in December, after the lender failed to secure EUR5 billion ($5.35 billion) from private investors to stay afloat. The Italian government set up a EUR20 billion rescue fund in December that will also be available to other ailing banks, should they need it.

Analysts and bankers hailed the move as a great leap forward in shoring up the financial system. However, several Italian banks are still grappling -- and will likely continue to -- with high costs and decreasing revenue.

"I am positive [on the government move] as a solution for the banks' problems of capital," said Alberto Nagel, Mediobanca SpA's chief executive. "But issues on Italian banks' profitability will remain."

One of the main drags on local lenders' profitability is the massive amount of bad loans still sitting on their balance sheets, which requires provisions for potential losses quarter after quarter.

The most toxic bad loans, or so-called sofferenze, where a debtor is deemed insolvent, stood at EUR200 billion in December, roughly the same level as for the same month of 2015 and 1% higher than in November.

Rock-bottom interest rates continue to take a heavy toll on Italian banks, as they are predominantly commercial lenders and make most of their revenue from lending.

To make matters worse, Italy has been in and out of recessions in the past 10 years, while losing around a quarter of its industrial production.

This past year, lenders' results -- including those of the strongest banks such as Mediobanca and Intesa Sanpaolo SpA -- also have been dented by one-off contributions to rescue funds set up to help weaker lenders. The situation is a sign of how results of Italian banks are still under pressure due to the fragility of the whole system.

On Thursday, UniCredit SpA, Italy's largest bank by assets, posted a jumbo loss of EUR13.6 billion for the last quarter, largely due to billions of provisions for losses on soured loans. Meanwhile, a EUR13 billion share sale launched on Monday to shore up its finances continues.

The share sale is guaranteed by a pool of banks that agreed to buy any unsold shares and it is slated to be completed by March 10.

Mr. Nagel said that UniCredit's rights issue is another event, which, coupled with the government's fund, is set to stabilize the system during the first half of this year.

However, UniCredit's revenue shows how lenders are still heavily under pressure. Its net interest income -- the difference between what lenders earn from loans and pay for deposits, and a key profit driver for retail banks -- dropped by 13% in the fourth quarter, compared with the same period a year earlier and by 7% from the previous quarter.

Its fees declined by 5% from a year earlier and total revenue by 11%. The bank also took a charge of EUR1 billion, mainly due to the write-down of its stake in a backstop fund for banks Atlante, and other stakes.

Meanwhile, Italy's second-largest lender Intesa said last week that without one-off contributions to a national resolution fund for banks and other funds, as well as a write-down of its stake in Atlante, its net profit for the fourth quarter would have been EUR1.15 billion, instead of EUR776 million.

Write to Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

February 09, 2017 13:45 ET (18:45 GMT)

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