Banks in Italy are likely to surpass their European peers in terms of profitability in 2024.

The weighted average return on average common equity (ROACE) for rated Italian banks is expected to hit roughly 14% for the year, versus about 12% for UK rivals and 11% for Spanish lenders, according to Mirko Sanna, lead analyst for financial institutions at S&P Global Ratings. The estimates are around 7% for banks in France and 6% for those in Germany.

Italy's top two banks, Intesa Sanpaolo SpA and UniCredit SpA, are projected to register a return on equity (ROE) of 13.07% and 12.64%, respectively, for 2023, according to current S&P Capital IQ consensus estimates — far higher than the 2022 figures. Intesa's will tick down to 12.97% in 2024 and 12.76% in 2025; UniCredit's will decline to 12.00% in 2024 and 11.60% in 2025.

Italian banks' performance was boosted by significantly higher lending income, with resilience forecast for the coming years.

Intesa, UniCredit and midsized lenders Banco BPM SpA, BPER Banca SpA and Banca Monte dei Paschi di Siena SpA are expected to record an aggregate net interest income (NII) — the difference between interest earned on loans and that paid to depositors — of nearly €37 billion for 2023, S&P Capital IQ consensus estimates show. The figure is almost 43% higher than in 2022 and a 69.5% jump from 2021's total.

NII is expected to reach €35.61 billion in 2024 and €34.34 billion in 2025.

Analysts expect 2023 profits at Intesa Sanpaolo and UniCredit to be above €7.6 billion, surpassing the banks' own guidance of at least €7.5 billion and €7.25 billion. Profit at Intesa is seen exceeding €7.90 billion in both 2024 and 2025, while UniCredit's is projected to tick down to €7.31 billion in 2024 and €6.99 billion the following year.

Despite headwinds facing the banking sector following the Italian government's introduction of a windfall tax in 2023, banks' profits and revenues are poised to rise again in 2024 then level off in 2025 as interest rates peak and likely come down, according to analysts at Dividend Forecasting, part of S&P Global Market Intelligence.

Italian banks are projected to distribute €10.2 billion in dividends for 2024, a 38% increase on the estimate for 2023, Dividend Forecasting analysts said. The banking sector is Italy's biggest contributor to aggregate dividends and accounts for 28% of the estimated €36.3 billion to be distributed this year.

Following bumper profits, Intesa intends to make additional capital distributions for 2023 on top of its cash payout ratio of 70% through 2025 — already one of the highest levels among European banks. UniCredit expects shareholder distributions for 2023 and 2024 to total €6.5 billion or more, and could propose an extraordinary share buyback.

– Access dividends details for Intesa Sanpaolo and UniCredit on CapIQPro. – Access the Peer Analysis template on CapIQPro.

Italian banks have made strides in cutting costs in recent years and are projected to maintain a weighted average cost-to-income ratio of below 50% for 2023 and 2024, another contributing factor, according to Ratings.

Among the five banks, UniCredit is projected to log the best efficiency ratio for 2023 at 40.9%, followed by Intesa at 44.2%, according to S&P Capital IQ consensus estimates. Both banks are likely to maintain their ratios at around 44% in the next two years.

Italian banks, like those in other European countries, tightened their credit standards due to expectations of asset quality deterioration in the higher-for-longer interest rate environment. Loan losses at the five Italian banks are expected to be largely contained in the coming years, with provisions forecast at €3.92 billion in 2023 and under €5 billion in 2024 and 2025, S&P Capital IQ consensus estimates indicate.