| The Italian banking system faces complex challenges as it restructures in preparation for complete or partial privatization. A recent report by US credit-rating agency Standard & Poor's (S&P) points to profitability and capitalization problems that partly result from much of the industry being directly or indirectly state-controlled and partly from fragmentation. It notes that although there has been economic recovery in the past two years, Italy's banks are still dogged by the low profitability that emerged at the beginning of the decade because of recession and deteriorating asset quality. This stagnation, the report adds, reflects "tougher competitive pressures on operating margins and insufficient cost controls". Capitalization is another peculiarly Italian problem. Whereas banks in most other European countries have strengthened their capital bases in recent years, in Italy, the S&P report notes, these have declined "because of poor earnings retention and ambitious acquisition strategies". Low profitability and weak capitalization have adversely affected Italian banks' credit ratings. The S&P report notes that Italy is near the bottom of the EU pile, with its "12 largest institutions having an average rating at the low end of the 'A' category". Italian banking's sorry state is to a large extent a result of its history. |