Manageable CRE Risks for Italian Banks and Insurance Companies Compared to European Peers

The commentary focuses on the Italian Commercial Real Estate (CRE) sector, providing an analysis of CRE exposures of banks and insurance companies. Summary highlights from the commentary include:

• The CRE sector has become more vulnerable given the convergence of various factors such as the increase in building material costs, rising interest rates, as well as climate change and post-pandemic structural adjustments.

• Italy is the fourth largest CRE bank loan market in Europe according to European Banking Authority data at end-March 2023. Unlike in other European countries, CRE loans have declined in Italy, in part reflecting the balance sheet clean-up of the banking sector, reduced appetite for the CRE sector, and the modest level of new construction.

• CRE loans accounted for around 11% of Italian banks' customer loans as of end-March 2023, slightly above the EU/EEA average, and the NPL ratio for CRE remains higher, albeit reduced, in Italy compared to the EU average.

• Insurance companies are generally exposed to real estate assets worldwide, attracted by higher yields during the low interest rate environment, and the long-term nature of real estate investments which is in line with the maturity profile of the liabilities of most companies.

“Indicators support our view that risk in the CRE sector has increased, therefore Italian banks have tightened lending standards for new loan originations in CRE,” said Andrea Costanzo, Vice President from the DBRS Morningstar Global Financial Institutions team. “In our view, Italian insurance companies' exposure to real estate assets is generally manageable and the level of concentration in the investment portfolios compares favourably to EU peers,” noted Mario De Cicco, Vice President, Insurance at DBRS Morningstar.