SME loans, not mortgages, can be a pain point for Italian banks during the pandemic
A moratorium on mortgage payments in Italy amid the coronavirus outbreak will be a useful safety valve for borrowers and banks, according to industry experts, who warn small and medium-sized businesses could be the biggest worry.
Deputy Economy Minister Laura Castelli told a local radio station earlier in March that the government would suspend mortgage payments in order to mitigate the economic impact of COVID-19, the disease caused by the coronavirus. The government has yet to make an official announcement and the finance ministry had not responded to a request for comment at the time of publication. Italy has a few €383.23 billion outstanding residential mortgage loans, according to the ECB.
A number of large banks, including Intesa Sanpaolo SpA and UniCredit SpA, said they would grant a repayment holiday to troubled mortgage borrowers.
The whole country has been on confinement for more than two weeks. It recorded around 31,500 COVID-19 cases and more than 2,500 deaths as of the morning of March 18.
The disruptions are particularly acute for SMEs, which are more likely to default, an analyst said, which should put pressure on lenders such as Banca Monte dei Paschi di Siena SpA with low levels of profitability.
The state to the rescue?
Marco Troiano, executive director and deputy director of financial institution ratings at Scope Ratings, said it was important not to over-read the deputy minister’s comments on mortgage relief.
“This was just a comment, not an official statement. But it seems that some form of tolerance is coming,” he said in an interview.
Banks’ underlying profitability and capital buffers are a better indicator of who is most affected by a wave of mortgage suspensions, rather than the size of their mortgage portfolios, Troiano said.
He said that banks with low profitability are particularly at risk.
Monte dei Paschi has the lowest profitability of the major Italian banks, according to data from S&P Global Market Intelligence, with an average return on equity of minus 11.27% at the end of 2019. It is followed by Banca Popolare dell’Alto Adige SpA with a negative ROAE of 10.65%, while Unione di Banche Italiane SpA has a ROAE of 3.04%.
Troiano said that even in times of crisis, European homeowners generally have a good track record of tracking their mortgage payments.
“Most people will continue to pay off the mortgage on their first home,” he said.
Angela Gallo, senior lecturer in finance at Cass Business School in London, said the immediate financial impact of a mortgage holiday would likely fall on the government rather than the banks.
The government already has a fund designed to help distressed mortgage borrowers as long as they meet certain criteria, Gallo said.
The fund, Fondo di solidarietà per la sospensione delle rate mutui prima casa, allows a mortgage suspension of up to 18 months on the main residence of borrowers earning less than € 30,000 per year, on loans of up to 250,000. €.
If there were to be a general moratorium on mortgages, the main benefit for banks is to “allow them to keep / maintain a healthy relationship with their customers,” said Gallo.
Italian banks are better able to support borrowers than they would have been during the 2008 global financial crisis because they are better capitalized today than they were then, Gallo said.
Mortgage breaks are expected to have “a positive impact on the underlying customer,” Troiano said.
“However, as a bank you have to proceed with a certain degree of discrimination because you don’t want to encourage strategic defaulters,” he said.
In the UK, Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC have said they will provide relief to mortgage borrowers struggling due to the pandemic.
SMEs, however, are more likely to default and could be of greater concern to lenders than mortgages, Troiano said.
Banks can also consider relieving SMEs.
“Banks will want to make sure that a liquidity problem does not turn into non-performance,” he said.
Intesa said on March 7 that it was unlocking € 5 billion in financing for small businesses and families facing a cash shortage, in addition to relief for mortgage borrowers.
The outstanding loans to SMEs in Italy amounted to 170 billion euros at the end of 2017, according to the latest aggregate figures available from the Organization for Economic Co-operation and Development, or OECD.
SMEs represent 78.5% of all jobs in Italy, compared to a European average of 66.4%, according to the European Commission. Despite the disproportionate role they play in the economy, they account for 17.7% of the 958 billion euros in business loans in Italy, according to OECD data.