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Bank of Italy Says Companies Remain Vulnerable in Recovery

Italian companies remain financially vulnerable as risks ranging from low inflation to shifts in foreign investment could threaten economic growth, the Bank of Italy said.

“In Italy, the economic recovery is spreading, but it remains fragile,” the central bank said in its semi-annual report on financial stability. “Although some positive signs are emerging, the financial conditions of firms remain weak.”

Italian companies have been hurt by contractions in bank credit and four recessions since 2001. As the economy returns to growth, expanding 0.1 percent in the fourth quarter, the vulnerability of companies persists due to debt levels and difficulties in collecting payments from the public administration, the Bank of Italy said.

“Yes, the economy is getting better, but we are not out of the woods,” said Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London.

Demand is expected to improve in coming months, particularly for exporters and the largest companies, and investment conditions are seen as more favorable, the central bank said, citing business surveys. The financial stability of households has improved as consumption fell and savings increased, according to the central bank.

‘Modest Recovery’

“The modest recovery in economic activity continues, helped by good export performance,” the Bank of Italy said in the report. “Significant risks remain, particularly in relation to macroeconomic developments.”

Low inflation, if lasting, could be a burden for companies that carry large amounts of debt, and non-performing loans could diminish bank profitability and curb new lending, the central bank said. Further increases in long-term U.S. interest rates could be transmitted to euro rates, a risk that “has faded, but not vanished entirely,” it said.

The assessment of Italian banks has improved this year because of the narrowing of sovereign bond yield spreads and capital strengthening, which helped lenders increase liquidity and reduce funding costs, according to the report.

Investors Shunned

Banks in the country are selling about 10 billion euros ($14 billion) of stock to shore up their balance sheets, as nations shunned by investors during the sovereign-debt crisis return to favor. The European Central Bank is conducting an asset review of 128 lenders, of which 15 are Italian, before becoming the euro area’s banking supervisor later this year.

“For the banks subject to the assessment, these equity injections will boost capital ratios by an average of about 1 percentage point,” the Bank of Italy said.

The improvement in funding conditions is helping the gradual repayment of the longer-term refinancing operations and making it easier to roll over maturing wholesale bonds. Italian banks, which borrowed more than 255 billion euros from the ECB in its LTRO’s auctions, have about 31 billion euros of bonds maturing from May to December, the report shows.

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