Article by Adriano Bonafede published on 07/08/2024 on Affari e Finanza, the Repubblica insert
2023 will be remembered as a truly special year for banks and insurance companies. In fact, both have achieved record profitability and have done so simultaneously, as has never happened in recent years. According to the Bank of Italy, the Return on equity (Roe) of credit companies has reached the percentage of 12.3%, never seen in the last decade. According to Ivass, the companies’ ROE has reached 10.5%: an unexpected success in many ways after the miserable 3.2% in 2022, an annus horribilis marked by the Eurovita crisis and the flight from life insurance policies. And a figure that is only third in the last decade after 2019 (12.3%) and 2010 (11.6%).
It must immediately be said that the way of calculating this profitability index is different for the two sectors, which is why they are not directly comparable with each other. The technicians explain that since 2005 banks have been using international IAS accounting standards, whereas companies have been using national accounting standards. But there is more: for companies the calculation method used by Ivass, the supervisory body, is different from that calculated by Ania, the business association. The differences are however marginal, only a few decimal points (those of Ania show slightly higher percentages). The Ania data also illustrates the difference between Roe of the Life branch and Roe of the Non-Life branch: in this way we see that in 2022 the profitability index is negative for the Life branch, for the first time in the last decade, minus 1%. And that this is compensated by the excellent result of the non-life classes, equal to 8.8%.
The fact remains that the calculations of Bankitalia and Ivass, reported in the Financial Stability Reports, nevertheless indicate a trend. And for banks the trend is the exit from the many problems of the last decade. Negative ROE exceeded between 2013 and 2016 (with the exception of 2015). The pandemic-induced crisis was overcome in 2020, with a paltry 1.9%. Credit institutions have started making profits again in 2022 (ROE of 8.7%) and above all in 2023 (12.3%). And the first quarter of 2014 is also moving in the same direction.
The Roe numbers show against the light the events that influenced and dominated the past decade. Between 2013 and 2017, the compressed profitability of banks was mainly due to the need to clear balance sheets of bad loans, while interest rates reached negative territory for the first time. Furthermore, even after the budget cleaning, rates remained very low. For banks, the ability to make adequate profits was called into question. All this while the companies maintained a ROE level that was not very high but was stably located between 8 and 9%. The banks were struggling, but the insurance companies were managing. The 2020 pandemic immediately punished the banks’ profitability, with a ROE falling to 1.9%. For the companies, however, a good year: fewer people out and about and fewer accidents, which cause claims to collapse and greater savings that agents and consultants exploit to sell more savings policies. But then things change: from 2021 the impact of the pandemic on banks is sterilized by some factors: public guarantees on loans and consequently greater support for the economy, flooding of liquidity by the ECB.
2022 is the turning point year: the sudden increase in rates galvanizes the banks, which move to a Roe of 8.7%, and is already overtaking – with all the limits of comparability – the companies, which dropped to 3.2 % and in the grip of the most serious crisis in the life sector, started by the Eurovita case and with the flight of savers from policies, abandoned to buy the more profitable government bonds.
In 2023, banks will reach peak profitability: the rates, which are still high, allow them to make profits with the interest margin, or the difference between active and passive interest on loans to businesses and families. But companies also surprisingly return to being profitable in 2023. This, according to technicians, depends on two factors.
The first, as the Bank of Italy writes in the latest Financial Stability Report, is that companies have been given the power to temporarily suspend the effects in the accounting of capital losses resulting from the increase in rates. Second, in 2023 the companies slowly bought up new Italian government bonds at higher rates, which increased their profitability. «The insurance sector – says Giuseppe Corvino, professor of Insurance management at Bocconi – is a solid sector. After Eurovita many thought it was at risk, but that wasn’t true. In the Eurovita case, the interests of the distributors were misaligned with those of the producers, but if they are aligned there is no problem.” While the Non-Life sector is growing a lot.
What will happen with the next rate drop? Companies will do great, with the revaluation of government bonds in stock. For banks, ROE could drop a bit. «But credit institutions – says Maurizio Primanni, CEO of Excellence Consulting – have been focusing on commissions for some time: more life policies and insurance, more funds, more paid consultancy, more services. It is therefore likely that they can maintain a good level of Roe.”
