EU Banks: NPLs on the Rise
Scope NPL Heatmaps
The European banking sector is bracing for a continued rise in non-performing loans (NPLs) despite expectations of modest economic recovery in the euro area. Scope Ratings' latest report reveals a concerning trend in the formation of NPLs across the region, driven by various economic and sector-specific factors.
Scope Ratings anticipates a modest GDP growth of 1.0% in the euro area for 2024, with further rate cuts expected to support economic activity into 2025. However, this modest recovery is not likely to stem the tide of rising NPLs. According to the European Banking Authority’s (EBA) latest risk dashboard, the total value of NPLs among EU/EEA banks increased to EUR 372.3 billion in Q1 2024. This represents a significant quarterly increase of EUR 7.6 billion, nearly 3.5 times the increase seen in the previous quarter.
Italy saw the largest quarterly increase among major EU/EEA economies, with its NPL ratio rising by 0.08 percentage points (pp) after a contraction in the previous quarter. This brings Italy’s NPL ratio to 2.44%, a notable reversal from its recent downward trend .
France’s NPL ratio continued its upward trajectory, reaching the 2%. This marks a consistent increase, reflecting ongoing challenges in managing loan performance.
Germany's NPL ratio climbed to its highest level since 2019, reaching 1.32%. The increase in NPLs is particularly significant in the corporate sector, suggesting broader economic pressures.
The rise in NPLs was balanced between corporate and retail loans. In Austria, corporate NPL formation is slowing, despite showing one of the highest quarterly increases. Conversely, Belgium and Italy are experiencing accelerating corporate NPL growth. Retail NPLs saw the most significant increase in Spain, where the retail NPL ratio is now the highest in the EBA sample at 3.87% .
Certain sectors have been disproportionately affected:
Information and Communications: This sector experienced the largest increase in NPLs, particularly in the Netherlands.
Water Supply and Real Estate: Both sectors saw significant increases, with the real estate sector warranting attention due to its large share of corporate exposures.
The cost of risk has increased notably in Germany and France, both crossing the 60 basis point mark. The EBA dashboard highlights that smaller banks are the most affected, although there was a slight decline in Stage 2 loans to 9.4% of total loans from 9.6% in Q4 2023, which is a positive sign amidst the challenges .
While the economic outlook for the euro area shows some promise of recovery, the persistent rise in non-performing loans underscores ongoing vulnerabilities in the banking sector. Italy, France, and Germany, in particular, face significant challenges in managing NPL growth, with sector-specific issues further complicating the landscape. The coming quarters will be critical for EU banks as they navigate these complex dynamics and strive to maintain financial stability.
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Relevant Links:
https://scoperatings.com/ratings-and-research/research/EN/177428
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