Intesa in the realm of banking, decisions regarding provisions play a crucial role in shaping financial strategies and reflecting risk management policies. Recent reports of record annual profits from Italy’s two major banks, Intesa Sanpaolo and UniCredit, shed light on their disparate approaches towards provisions, despite both benefiting from reduced loan losses.
Divergent Cost of Risk
The cost of risk, a metric measuring provisions against total loans, stands at 36 basis points (bps) for Intesa and 12 bps for UniCredit. This significant variance underscores distinct risk management philosophies between the two institutions.
Intesa’s Chief Executive, Carlo Messina, elucidated that the bank maintains a minimum threshold of 30 bps for its cost of risk, regardless of immediate necessity. This cautious approach reflects Intesa’s commitment to prudential risk management practices.
In contrast, UniCredit’s decision to maintain a lower cost of risk aligns with its broader market presence across 13 countries, with Italy constituting a substantial but not dominant portion of its revenue. This diversified revenue stream affords UniCredit a different risk profile compared to Intesa.
Overlay Provisions and Regulatory Scrutiny
Both banks employ overlay provisions to mitigate risks not captured by existing models. However, UniCredit’s overlays, double the size of Intesa’s, raise questions about their sustainability and regulatory compliance.
European Central Bank supervisors have initiated a review of overlay usage, emphasizing the need for credible and consistent provisioning practices. UniCredit’s substantial overlays, while bolstering asset protection, warrant scrutiny regarding their long-term viability and adherence to regulatory guidelines.
Capital Resilience and Economic Outlook
UniCredit’s excess capital reserves, exceeding 10 billion euros, bolster its ability to weather potential shocks. This surplus capital, coupled with stringent lending criteria, reinforces UniCredit’s resilience in the face of economic uncertainties.
Bank of Italy Governor Fabio Panetta’s recent call for banks to bolster capital reserves underscores the prevailing economic fragility and the imperative of prudent financial management. As economic conditions remain tepid and default rates loom, Panetta’s admonition resonates with the broader banking sector.
Forecasted Cost of Risk and Loan Portfolio Analysis
Looking ahead, UniCredit anticipates its cost of risk to remain below 20 bps, reflecting confidence in its risk mitigation strategies. In contrast, Intesa, while projecting a slightly higher cost of risk, maintains provisions to facilitate potential loan disposals.
A detailed examination of their loan portfolios reveals nuanced differences. Intesa’s gross impaired loans stand at 2.26% of total lending, with provisions covering 50% of impaired loans. In comparison, UniCredit reports a gross impaired loans ratio of 2.7%, with provisions covering 47% of impaired loans.
Conclusion
In conclusion, the contrasting approaches of Intesa and UniCredit towards provisions underscore the complexity of risk management in banking. While Intesa adopts a conservative stance to uphold prudential norms, UniCredit’s strategy reflects its diversified market presence and risk appetite. As regulatory scrutiny intensifies and economic uncertainties persist, both banks navigate a delicate balancing act between profitability and risk resilience.