orderly but resolute fashion, especially by smaller banks, whose npl ratios are higher and coverage ratios lower than those of the significant banking groups. the improvement in the quality of banks ’ assets was facilitated by the development of the market for npls : in the three years 2016 - 18, npl disposals amounted to more than €120 billion, gross of provisions ; so far this year they came to around €20 billion. this was due not just to the fact that banks can access the state guarantee scheme ( gacs ) for securitized bad loans, which was renewed in march of this year, but was also spurred by the early results of the reforms undertaken to reduce the length of credit recovery proceedings, which deters investors and affects disposal prices. the expected time needed to sell foreclosed property decreased from more than three years to around two years. the expected length of time needed to complete all preparatory procedures also declined, albeit by only three months, to just over two years. there is still room for further reductions, which can be accomplished in part by following the best organizational practices promoted by the high council for the judiciary, whose effects can already be seen in some areas of the country. progress can also be achieved by turning more frequently to corporate restructuring and turnaround specialists ( e. g. turnaround funds ). this could lead to some ‘ unlikely - to - pay ’ loans returning to performing status, benefiting both banks ’ balance sheets and the economy. the credit recovery sector has grown significantly in recent years. this development has contributed to the reduction in npls in banks ’ balance sheets, but it is not free of problems. inefficient recovery performance can erode value, reintroduce risks to banks ’ balance sheets and, in extreme cases, have repercussions on the guarantee provided by the state through the gacs. the bank of italy remains highly vigilant in supervising the intermediaries for which it is responsible. banks ’ profitability was helped by low funding costs and the drop in loan loss provisions ; excluding extraordinary items, in the first six months of 2019 the return on equity was about 7 per cent on an annual basis. net interest income remains under pressure, also due to increased competition in the market for loans to high - quality customers. banks, especially small ones, must continue to diversify their sources of revenue and to contain their costs ; less significant banks have reduced their operating expenses by just under 1 per cent

in the first half of this year, compared with a drop of almost 4 per cent for the significant banking groups. better profitability is critical for banks, and not just italian ones, to enable them to meet the challenges posed by competitive pressures, by prudential regulation, by the new european crisis management framework, and by technological innovation in the financial sector. this is essential for small and medium - sized banks which are still suffering from the effects of the deep and protracted economic recession, especially in the south of italy. among other things, these banks face greater difficulties in accessing the market for debt and equity capital. the heterogeneity of financial intermediaries in terms of firm size, business models and corporate form can play an important role in the proper functioning of the system. however, it must be compatible with the safety and soundness of banks, which is essential for them to remain in the market. from this standpoint, achieving various forms of integration could help significantly by unlocking the benefits associated with a larger operating scale, a wider range of products, and the adoption of innovative technologies. with the launch this year of two new cooperative banking groups ( iccrea and cassa centrale banca ), this sector can continue to support local economies from a much sounder position. as a result of the reform, the structure of the italian banking system has undergone extensive change, moving towards less fragmentation. as of last june, the 12 significant groups ( which include both cooperative banking groups ) held almost 80 per cent of the system ’ s total assets. many of the about 90 less significant banks, with the exception of the raiffeisen banks for which an institutional protection scheme is to be established, operate on a very small scale, which also impacts their ability to adapt their business models to technological change : more than half of them report assets of less than €1. 5 billion and over one third of less than €1 billion. effective integration must be pursued in this sector as well, especially among the smaller popolari banks, which suffer from the typical governance problems that stem from the cooperative banking model. for these popolari banks, the measures and projects we have been suggesting for some time for their strengthening need to be implemented quickly. * * * to make the fullest possible use of the expansionary potential of the monetary policy measures adopted by the ecb governing council, the other policies also have to move in the same direction. fiscal policies that support economic activity