DBRS on Corporate Bankruptcies
Impact on Banks' Asset Quality Should Remain Manageable
DBRS Morningstar released a commentary on the rise of corporate bankruptcies in Europe, their causes, and the potential impact on European banks’ asset quality.
Bankruptcies in the European Union (EU) reached their highest level since 2015 at end-Q2 2023. The number of bankruptcies in Europe has been gradually rising since Q1 2017, but this trend was interrupted amid the Coronavirus Disease (COVID-19) pandemic as most European governments adopted unprecedented measures to support businesses.
From the beginning of 2022, the pace of European bankruptcy filings resumed an upward trend, which has continued into 2023. DBRS Morningstar believes this could have a collateral effect on European banks, as a prolonged rise in bankruptcies often drives a cumulative deterioration in asset quality. Whilst the impact should be manageable for most European banking sectors, some countries will likely be more affected given their high exposure to the most vulnerable segments of the economy in this context.
According to data from Eurostat, EU seasonally adjusted bankruptcy declarations rose by 8.4% quarter on quarter in Q2 2023, surpassing Q3 2019 levels prior to the onset of the pandemic and reaching the highest level since 2015.
Although bankruptcy declarations since 2022 have been on an upward trend for almost all economic sectors, the increase has not been evenly distributed amongst activities. The transportation and storage segment has reported the sharpest increase in bankruptcies, followed by accommodation and food services and education, health, and social activities. While some sectors remained more stable during the pre-pandemic period, defaults within transportation and storage have been on an upward trend since 2017, and after a brief decline in early 2020 (presumably due to coronavirus aid during 2020 and into 2021), the trend continued upward.
DBRS consider the European banking sector as quite diversified in terms of business sectors overall. Data from the European Banking Authority transparency exercise at end-Q1 2023 showed that the European banking sector did not show concentrations higher than 6% in most business sectors, except for real estate activities (25.1%), manufacturing (15.7%), and wholesale and retail trade (12.8%). In particular, the overall exposure to the most vulnerable sectors was relatively low, at 5.5% for transportation and storage and 2.6% for accommodation and food services. We expect the rise in bankruptcies resulting from the current environment to lead to a deterioration in asset quality for European banks. However, we view this as manageable for the European banking system overall given the relatively low exposure to the most vulnerable sectors.
Nevertheless, banks in some European countries showed concentrations higher than the European average in the transportation and storage and accommodation and food services sectors at end-Q1 2023; these are mainly countries with a heavy reliance on the tourism industry, notably Greece, Cyprus, Malta, Croatia, and Portugal, which report combined exposures ranging from 14.7% to 30.3%. In our view, this will present challenges for the banking sectors mentioned above, as these countries typically report higher nonperforming loan ratios than the European average. We will keep monitoring this closely, as these higher concentrations could lead to a quicker and more significant deterioration in the banks' portfolios in these countries.
Relevant Links:
https://www.dbrsmorningstar.com/research/420149/higher-corporate-bankruptcies-in-europe-but-impact-on-banks-asset-quality-should-remain-manageable-for-now
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