Why the pace of banking stocks slows but does not stop

Banks are solid and in good health, a picture that is not expected to change for many months, although profit-taking will increase especially after the very positive performance and in a more challenging scenario due to falling rates. Since the beginning of the year, banks remain among the best performing sectors. Second quarter results were positive and visibility on 2024 is high. It is thanks to them that Piazza Affari has earned the pink jersey in Europe, given its strong weight on the index. "Revenues have benefited from a better interest rate scenario than forecast at the beginning of the year and positive signals are coming in on the commissions front, thanks to the good performance of the markets, which has led to an increase in assets under management," emphasises Alberto Villa, head of equity research at Intermonte. Moreover, provisions for credit risks are currently at an all-time low and credit quality has improved in structural terms, thanks to portfolio cleaning policies'.

With a macroeconomic scenario characterised by modest economic growth, there should be no significant deterioration in the cost of credit risk. However, there are some uncertainties in the picture, which are well summarised by Filippo Alloatti, head of the finance and credit division of Federated Hermes: "The recent quarterly reports with the lavish cheques paid out to shareholders (including share buy-backs and rich dividends, ed.) certify the good health of Italian banks. There continues to be a sort of battle between the various managements in updating the estimates for the intermediation margin and the group's net result expected for 2024 ever upwards. But at these record profit levels, growth inevitably slows down. Either because of the turnaround in Frankfurt's prudent monetary policy, or because of the lack of appetite in demand for credit on the corporate and household side. However, the sector remains cyclical. It must be conisdered that the Italian deficit must be covered and the rich bank accounts could lead the pragmatic Minister Giorgetti into temptation'.

Alberto Villa also agrees on a possible drop in revenues, but he also emphasises the banks' ability to compensate for this with a greater contribution from commissions from asset management and insurance products, and with the crystallisation of high coupon flows for the coming years. The decline in banks' profits will be there: Intermonte's estimates speak of a -5% in 2025 compared to the peak expected this year, but the generation of profits and distributable capital remains attractive. "Even in 2024 our expectations are positive with distributions of 21 billion - adds Villa - a crucial element for the sector, given that the expected average dividend yield is in the 9% area, which is increasingly attractive with the expected fall in rates. However, we cannot expect the sector to continue to be the driver of upward momentum in the Italian stock market. Over the past two years, banks have closed the valuation gap with European banks and now trade at higher multiples. However, this should not come as a surprise given their capital strength and higher level of resilience, also thanks to lower exposures to risky business segments'.

Looking ahead to 2025, the focus is on savings products and banks that concentrate their attentions on product factories. "Intesa, which has such factories in house, and UniCredit, which is renegotiating its distribution agreements, are well placed," Alloatti details. "Monte dei Paschi remains interesting, given the speculative appeal linked to M& A, as the end-of-year deadline for re-privatisation approaches. Villa also prefers banks that are more exposed to financial services and has positive expectations for stocks that have asset management in their DNA, such as Intesa, Credem, Banca Mediolanum, Banca Generali and Mediobanca.