MILAN (Reuters) - A worsening economic outlook poses the biggest risk to Italian banks because it dampens earnings expectations and makes it more difficult for them to access the capital market, the central bank said on Friday.
In its twice-yearly Financial Stability Report, the Bank of Italy flagged a weakening of the credit cycle with bank lending to families rising only slightly and the recovery in corporate lending coming to a halt.
Risks stemming from the real economy and the Italian government bond market translated into asset risks for Italian banks, it said.
"The slowdown in production halts the growth in high-quality loans and, if protracted, the reduction of non-performing loans," the Bank of Italy said.
Italian banks held 189 billion euros ($211 billion) in gross soured loans at the end of last year, after sales worth 55 billion euros in the course of 2018.
Lower loan losses have improved Italian banks' capital reserves but the gap between expected profitability and the cost of capital has worsened by 80 basis points and is negative overall by 4.5 percentage points, the Bank of Italy said.
By contrast, the average spread between the return on capital and its cost for larger banks within the European Union is positive by 0.8 percentage points, it said.
