EU NPL Progress Made, Risks Remain

A commentary by ARC Ratings on Europe’s NPL Cleanup

Europe’s banking sector has spent the last decade aggressively tackling its legacy of non-performing loans (NPLs)—and the numbers show it’s paying off. According to ARC Ratings, the NPL ratio in countries like Spain and Italy plummeted from crisis-era highs of 16.2% and 17% in 2014 to just 3.4% and 2.8% by 2024, respectively.

This progress stems from a coordinated push by the European Central Bank (ECB) and national regulators to reduce risk. Key tools included loan write-offs, restructurings, securitisations, and direct sales. Securitisation in particular became a go-to strategy in Western Europe thanks to liquid markets and low interest rates that amplified its cost-efficiency.

But under the surface, ARC warns, risks are still simmering. While Stage 3 loans—those most at risk of default—dropped from 3.1% in 2019 to 2.2% in 2024, Stage 2 loans (which indicate elevated credit risk) surged from 7.4% to 11.1% over the same period. That growth suggests a larger pipeline of loans at risk of becoming fully non-performing during any future downturn.

“The rise in Stage 2 loans is a signal,” ARC Ratings noted. “It highlights a growing pool of potentially deteriorating loans, suggesting that credit risk remains elevated and could drive an NPL increase during periods of economic stress”.

The macroeconomic backdrop is both a cushion and a concern. European GDP is projected to grow 1.5% in 2024 and 1.7% in 2025, and unemployment rates are falling from pandemic highs. But geopolitical instability, modest growth forecasts, and the lagging effects of tighter monetary policy mean that banks can't afford to relax.

Looking ahead, ARC emphasizes the need for improved risk sensitivity and early-warning systems to catch defaults before they happen. Robust borrower assessments, better loan origination practices, and careful management of Stage 2 exposures are essential to keep the sector stable.

And on the post-default side, the growing appetite for distressed debt in the secondary market offers banks new options for offloading risk—though higher financing costs and volatile conditions could temper investor enthusiasm.

In short, Europe has cleaned up much of its NPL mess. But as ARC Ratings concludes, maintaining that progress will demand vigilance, smart regulation, and adaptive risk strategies—especially if the economy hits another rough patch.

Entering Italian NPE Market is a Newsletter and a Linkedin Group focused on News, Updates, and Insights on Italian Banks, Distressed Credit Markets, Fintech, and Real Estate.

Relevant Links:

https://arcratings.com/researches/european-npl-market-update/

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