Fitch: Italian Bank Lending Signals Gradual Economic Improvement

Improving borrowing conditions for Italian companies and consumers signalled in the ECB's 1Q15 euro-area bank lending survey support our view that the country's prolonged economic slump is gradually easing, says Fitch Ratings. Fitch forecasts positive, albeit low, GDP growth of 0.6% for Italy in 2015 and 1% for 2016. Italy's sovereign ratings were affirmed on Friday.

End-February 2015 figures from Istat show that bank lending to the private sector continued to contract (down nearly 2% on comparative figures for 2014), with some banks further deleveraging. However, indications are that a turning point has been reached. Italian banks are budgeting total loan growth for the year of around 3%-4% which, although low, is in excess of GDP growth expectations and is positive following several years of contraction.

ECB data on bank lending suggests some recovery in loan growth in the opening months of this year. Credit demand for housing and other consumer loans in Italy in 1Q15 outstripped demand in other eurozone countries. New loans made to companies, on the other hand, were flat. However, the bulk of any new lending extended to companies is being applied to finance inventories and working capital, potentially signalling a flow of new orders. New manufacturing orders were up nearly 6% in December 2014 but there is no clear trend with mixed signals for manufacturing output.

Consumer confidence appears to be slowly returning, spurring loan demand to fund buoyant durable goods sales, including cars where new registrations grew by 7% in 1Q15. Demand for housing loans is particularly strong, reflecting improving sentiment, supported by low interest rates. Rejection rates are declining, but competition continues to force margins down on retail mortgages.

Italian banks eased lending terms and conditions to companies in 1Q15, albeit at the expense of margins, which are still narrowing after competition increased because of T-LTRO take up in 2H14. According to the banks, margin narrowing is only occurring on lower risk loans; margins on riskier loans to enterprises are higher. Recent surveys conducted by local observers, combined with data supplied by the Bank of Italy, highlight that business confidence among small and medium-sized (SME) companies has reached a four-year high, with more than half the respondents saying they are more likely to make, rather than cut back on, new investments in the coming months.

In addition to low interest rates and the expectation that Italy will exit its protracted recession in 2015, credit demand is receiving a boost from buoyant merger and acquisition activity among Italy's SMEs. Deals involving Italian targets, valued at around USD19bn, are up nearly 400% over the past 12 months. Consolidation might pave the way for new financing requests, provided the financial health of the enlarged company is solid.

However, loan growth signals received from Italian banks are still fragile. Some key sectors, such as construction, are still reporting low levels of investment.