Italy's top two banks, Intesa Sanpaolo and UniCredit, were forced to set aside billions of euros to offset a marked increase in risky loans as they reported sharp falls in second-quarter profits on Friday. Intesa, Italy's biggest retail bank, set aside 1.08 billion euros ($1.31 billion) in the second quarter, up 31 percent from a year earlier, as bad loans rose by 13 percent. UniCredit's provisions against loan losses totalled 1.9 billion euros, up 62 percent.
The figures reflect the difficult macroeconomic backdrop in Italy, where Intesa and UniCredit earn 80 percent and 40 percent of their revenues respectively. It aly's economy is expected to shrink by about 2 percent this year. The provisions weighed heavily on UniCredit second-quarter profit, which came in at 169 million euros, badly missing a consensus analysts' forecast of 302 million euros.
Intesa performed better, with a net profit of 470 million euros beating several analysts' expectations thanks mainly to a 173 million euro one-off tax refund. The headline figure, though, was still down 41.5 percent on the previous quarter. "The economic situation in Italy is clearly challenging," UniCredit Chief Executive Federico Ghizzoni said in a conference call with analysts. Concern over the economic downturn in the euro zone's third-largest economy was one of the factors cited by ratings agency Moody's when it downgraded Intesa, UniCredit and other Italian banks last month after a two-notch cut in Italy's sovereign debt rating.
Italian lenders are under pressure because of a spreading debt crisis and are regarded as vulnerable because of their vast holdings of domestic government bonds and increasing funding costs. Intesa has the highest exposure among Italian banks to Italian sovereign bonds - nearly 80 billion euros. UniCredit's exposure is about half that amount. On a more positive note, both banks improved their capital strength and reported a rise in customer deposits over the quarter.
Intesa said that its core Tier 1 ratio, a measure of financial strength, stood at 10.7 percent, compared with 10.5 percent at March 31. UniCredit core Tier 1 edged up to 10.4 percent, helped by a 7.5 billion euro cash call this year - its third since 2008. Customer deposits were up 2.5 percent at Intesa and 2.8 percent at UniCredit. Both lenders also said that liquidity and funding was strong, with about 70 percent of their refinancing plans for the year completed.
The banks are keen to turn the corner after a difficult 2011, in which they reported a multibillion-euro loss because of big writedowns on goodwill to clean up balance sheets ravaged by the euro zone debt crisis. To revive profitability and keep a lid on costs, lenders across Italy are cutting thousands of jobs and branches while reducing their loan portfolios.
Intesa and UniCredit shares have lost 22 percent and 35 percent of their value respectively since the beginning of the year, underperforming the European banking sector as a whole. The shares of both banks rose on Friday in a banking sector buoyed by expectations that the European Central Bank will eventually intervene to lower spiralling Italian and Spanish government bond yields. UniCredit was up 7.4 percent and Intesa 9.7 percent at 1415 GMT, having suffered big losses on Thursday.
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