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European banks: Problem loans remain an issue despite significant progress

Publication Date: 06 Jun 2018 - By ReachX Team By ReachX T.

Equity Fundamental Macro Equity UK EU Financial Services


Four years after the end of the sovereign debt crisis, significant progress has been made by European banks in cleaning up their loan portfolios and restoring capital buffers, according to a new report published on Wednesday (6 June), even though large stocks of problem loans still remain a heavy burden.

In a research note for its clients, ratings agency Moody’s said levels of non-performing loans (NPLs) were particularly high in 2013 in the aftermath of the sovereign debt crisis at 6% of total loans on average, based on a sample of 28 large European banks. 

“The ratio has now dropped to around 4%: a significant improvement, though progress is not compelling at all banks,” agency opined, noting that "large stocks of non-performing loans are a concern for European banking supervisors, with high asset risk hobbling a recovery in banks' stand-alone creditworthiness." 

In 2013, aggregate loan-loss provisioning absorbed 53% of the sample group's aggregate pre-provision income. Helped by economic recovery, that figure fell to 20% in 2017.

“Between 2013 and 2017, capital buffers rose at nearly all the banks in our sample, increasing resilience by allowing banks to better absorb the costs of credit risk. The average Tier 1 capital ratio for the group improved to 17.2% at the end of 2017 from 14.2% at the end of 2013,” said Alain Laurin, an Associate Managing Director at Moody's. 

"In some countries, high levels of non-performing loans could weigh on banks' ability to support economic growth."

Unsurprisingly, the highest NPL levels are in small countries, but some of the largest countries are not yet out of the woods either. 

In Greece and Cyprus, NPLs are above 30%. In Italy, NPLs stood at 11%, in Poland they measure 5.8% and in Spain 4.5%. Moreover, problem loans at Spanish banks do not include repossessed real-estate assets. “If included, these would inflate the NPL ratios,” Moody’s concluded.


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