Mega trend e Outlook

OUTLOOK FOR BUSINESS OPERATIONS

The general framework, already impacted by the continuing pandemic, was made even more complicated by the tensions generated by the Russian invasion of Ukraine, with inevitable effects on the outlook for growth and expectations of inflation, driven by the increase in the cost of raw materials.

The Russian aggression was immediately strongly condemned by both the European Union and by the United States and all NATO member countries. Said condemnation was followed by the approval of a large range of sanctions against Russia, including the block of technology exports, a ban on doing business with Russian state entities, strategic entities and those that produce gas and oil, as well as the block of the SWIFT system for Russian banks. The sanctions generated an immediate crisis of the Russian financial systems, which led to a rapid and substantial loss of value of the rouble, the downgrading of the sovereign rating, the potential serious risk of bankruptcy of Russian banks and the collapse of the prices of stock issued by Russian companies. The effects of the sanctions are, however, also going to impact the western countries that issued them and currently, macroeconomic prospects are very uncertain insofar as the influence of the above-described events on the same will greatly depend on the unforeseeable duration and outcome of the conflict under way. Today, lower economic growth in Europe is expected, and in that scenario, following the sharp growth recorded in 2021, the Italian economy is expected to slow its pace, which, however, will continue to benefit from the use of the Next Generation EU funds and continuing monetary conditions which, despite a less accommodating policy and rates gradually increasing, will remain favourable on the whole.

The Group’s operating performance during the year will inevitably continue to be influenced by the external environment, although Banco BPM is not expected to suffer any significant impact related to the Group’s direct exposure to Russia and Ukraine. This is because said exposure is extremely limited, equal to less than 0.1% of total on-balance sheet assets and unsecured loans.

Net interest income, which will be impacted in the second half by the lower contribution deriving from the end of the extra remuneration period on ECB funding in the form of TLTRO, will benefit from the increase in interest rates both in the commercial component and that deriving from the portfolio of financial assets. The Group presents significant sensitivity, equal to € 415 million in a scenario of a parallel shift of 100 basis points in interest rates.

Fee and commission income, though impacted by the overall slowdown in economic growth and tensions on the markets, will still be supported by the trend in the asset management and bancassurance segments, while strong governance of operating expenses will remain one of the key areas of focus of managerial action, with a view to limiting the impacts from the unlikely repeatability of certain cost recoveries that characterised last year (above all relating to personnel expenses), and the increases relating to application of the national labour contract for the industry, the increase in IT investments and inflation.

As regards adjustments to loans, the conservative approach to their measurement adopted in 2021 on performing and non-performing exposures, even faced with a default flow trend which, though still very low, could grow during the year in the event that the macroeconomic scenario worsens further, should allow further progress in the reduction of the cost of credit launched in recent years, without harming the derisking trend or the maintenance of a solid coverage level.

In summary, net of any significant deterioration of the scenario, the Group’s overall performance in 2022, given the leverage of 2021’s results that were better than expected, was envisaged to be consistent with the performance outlined in the Strategic Plan and with the relative medium-term targets.

Last update: May 2022

Economic scenario

In 2021, the global economy emerged from the recession provoked by the pandemic. The strong rebound after the collapse in 2020, initially driven by manufacturing, then extended to services, seemingly making a return to previous development trends: in several of the major advanced economies, GDP reached levels that were even higher than those of 2019, particularly in the USA and China, while in others, including Italy, this milestone will be achieved in 2022. In just five quarters, a deep recession was followed by a very fast recovery, with an unprecedented V shaped economic rebound. However, the rapidity of growth risks causing more damaging effects in the medium-long term than world economy could indirectly inherit from the pandemic: the increase in income inequality, widespread interruptions of supply chains, which started in 2020 and extended into 2021, as well as a healthy recovery of consumer price trends, especially in the advanced economies, facilitated by the unprecedented increase of money supply.

Following the 2.9% collapse in 2020, preliminary results indicate a 5.9% growth of world GDP in 2021 (IMF estimates), thanks to the substantial recovery of domestic demand, especially the services component, and of international trade. Towards the end of the year, a certain inconsistency of the paths towards economic recovery was noted in the industrialised countries, with better performance in Europe than in the United States and China. In fact, the aggregate figure conceals a differentiated scenario, between the advanced market economies and between emerging countries, which essentially reflects their different vaccination rates.

In this context, the pace of international trade increased considerably, especially in the first half of 2021, despite various obstacles to the full reactivation of value chains and a fall in trade with China in the second half of the year. Average annual growth is estimated to be +8.6% (Source Prometeia in constant USD 2000) against -5.2% in 2020.

Looking more in detail at the individual major economies, in the United States, after a brilliant start at the beginning of the year, also driven by the “Stimulus and Relief Package 4” measures from the end of 2020, in the third quarter, GDP recorded a marked deceleration (GDP of Q3 +2.3% annualised from +6.7% in Q2), mostly due to the slowdown in consumption and in non-residential fixed investments. In the last quarter of 2021, growth picked up pace: +6.9% annualised, driven by the recovery of consumption, +3.3%, but above all by the sustained momentum of gross private investments, +32.0%, also thanks to the component of intellectual property products, +10.6%. Lastly, towards the end of the year, we draw attention to the lack of approval of the “Build Back Better Plan” – the examination of which has been postponed to 2022 – which contains both the measures envisaged by the American Job Plan (to support the world of production) and by the American Family Plan (to support households). Average growth for 2021 stood at +5.7%. The strong recovery had a positive impact on the labour market: unemployment fell to 3.9% in December (6.7% at the end of 2020), while non agricultural jobs rose by around 6.5 million over 12 months. Despite this, job openings continued to be particularly high: 10.9 million in December 2021 against 6.6 million twelve months earlier, a mismatch that represents one of the significant constraints to aggregated supply. This phenomenon, through pressure on average hourly pay (+4.7% yoy at December 2021), also has a strong influence on inflation. Consumer prices, measured by the CPI, accelerated substantially in the period: +7.0% in December 2021, compared to +1.4% twelve months earlier.

In China, after a first half of significant recovery, encouraged by the generalised reopening of production activities and by the positive trend in social credit (total social financing), although at a slower rate, from the third quarter, economic activity (GDP +0.2%, +1.2% in the previous three months) suffered from problems in the real estate sector, which represents around one third of China’s GDP, weighed down by the significant financial difficulties of the real estate giant, Evergrande, which then went into default. This episode, which had limited financial contagion, was accompanied by a greater weakness of infrastructure investments with respect to the past, and by a tightening of the legislative framework, with a view to slowing down the excess lending to the private sector at a time in which the prices of energy products were rising and new lockdown measures related to the resumption of local cases were being implemented. Overall, China’s GDP for 2021 is expected to increase by +8.1%, against a rate of inflation, which recovered in December: +1.5% against +2.3% in November (+0.2% in December 2020).

In the first half of the year, the Japanese economy suffered from an extension of its state of emergency (and of the relative distancing measures), decided by the authorities of the country’s largest prefectures given the rise in the number of infectious cases. The recovery of consumption and of investment took place mainly in the second quarter (GDP +1.9% annualised), thanks to activities relating to the Olympics, as well as to corporate spending and investment fuelled by the rapid global economic recovery. However, it was dampened again by the spread of the Delta variant in the summer: GDP in the third quarter was -3.6% annualised. The Japanese manufacturing system, one of the main beneficiaries of the shift of the axis of global growth towards China, also suffered from the slowdown of its large Asian trading partner in the second half of the year, and growth for 2021 overall was +1.6% (against -4.8% in 2020). The new Government, in office from October and headed by Prime Minister Fumio Kishida, launched a package of stimulus measures in November worth USD 490 billion, aimed at increasing the momentum of growth, weakened by the pandemic.

Of the emerging economies, the acceleration of prices interrupted the recovery most abruptly in Russia and Brazil, where consumer price inflation reached 8.1% and 10.7% respectively in October. Nevertheless, both central banks increased interest rates numerous times during the year. The growth rate of producer prices towards the end of the year stabilised in both cases, against some relocations of supply. Estimates indicate for 2021 a growth in Russia’s GDP of +3.2%, while the growth of Brazil’s GDP was 4.9%.
International inflation recorded an abrupt acceleration during the year, +4.5% against +3.4% in 2020 (Source Prometeia), driven both by the sudden recovery in global demand, and, especially in the second half of the year, by the widespread increase in the prices of commodities and energy. Spot prices for oil exceeded 80 dollars a barrel (both Brent and WTI). The impact on inflation was exacerbated by the widespread difficulties along global supply chains, for example the shortage of semiconductors, which substantially affected the automotive industry, and the staggering increase in the cost of sea freight. At May 2021, the Baltic Dry Index had risen by +670% with respect to 12 months earlier. Expectations for inflation in the medium-term reached 3% in the United States.

Last update January 2022