Italy's large banks are well-positioned to deal with the expected worsening of asset quality in 2023, according to industry experts.

The lenders have comfortably low impaired loan ratios and solid risk governance processes, and some credit exposure is covered by state guarantees, which will help mitigate against declining asset quality, Fitch Ratings analysts wrote in a March 16 report.

The nonperforming asset ratio of Italy's largest bank, UniCredit SpA, is expected to worsen by 36 basis points, or 13%, year over year in 2023, according to analyst consensus estimates compiled by S&P Global Market Intelligence. The average ratio across UniCredit, Intesa Sanpaolo SpA, Banco BPM SpA and BPER Banca SpA is set to increase by 3.5%.

Italy's economy is set to stagnate in 2023 amid higher inflation and higher interest rates, prompting more borrower defaults, but banks' credit profiles are "well-positioned to absorb the effects," the Fitch analysts wrote.

Recent deleveraging and bad loan cleanup left Italian banks' loan books significantly less risky than ahead of previous recessions, meaning they can cope with an expected higher rate of defaults at small and medium-sized enterprises (SME), S&P Global Ratings said in a January outlook report. Their portfolios comprise a higher proportion of SME loans than banks in most other large EU economies, and smaller companies are typically more prone to default than other borrower types.

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Italian banks' nonperforming loans (NPL) in certain sectors exceeded the EU average at the end of 2022, according to European Banking Authority data released April 4. NPLs to the construction sector amounted to 9.3% of total loans, compared to an average of 6.2% across the wider continent. NPLs in real estate activities were also above average, although in both sectors the ratio had declined in the fourth quarter.

Italy lost about a fifth of its SMEs during the global financial crisis, and Italian companies are now more solid, with better ability to service debts, Intesa Sanpaolo Head of Group Treasury and Finance Alessandro Lolli said during a March 14 webinar hosted by Market Intelligence.

In the fourth quarter, problem loan ratios at BPER Banca, Banca Monte dei Paschi di Siena SpA, UniCredit and Banco BPM improved more than at any other large European bank, although Monte dei Paschi's ratio of 4.33% remained the highest. That of Intesa Sanpaolo worsened by 19 basis points to 2.38% from the previous quarter.

Italian banks are less exposed than the EU average to commercial real estate, a sector that analysts warn will be adversely impacted by inflation and higher interest rates, Scope Ratings wrote in a Feb. 17 research note.

They have taken "massive steps" toward de-risking their balance sheets in recent years, although there is still room for improvement, Scope said. Further increases in net interest income could boost profitability, the rating agency said.

UniCredit's loan portfolio is "cleaned up, with limited exposure to high-risk sectors," and the lender considers asset quality when taking on new business, a spokesperson for the bank told Market Intelligence.

Intesa is increasing its monitoring of commercial real estate but has allocated a significant portion of its management provision overlays to this sector and energy, a spokesperson told Market Intelligence.

Banco BPM and BPER Banca did not respond to a request for comment.