Marginal deterioration in NPL ratios

Scoper Ratings EU banks NPL Heatmaps in Q3 24

The third quarter of 2024 witnessed a marginal rise in non-performing loan (NPL) ratios across EU banks, signaling slight deterioration in asset quality. According to a recent commentary by Scope Ratings, the increase in NPLs was predominantly driven by non-financial corporate exposures. While the aggregate EU NPL ratio remains low, regional and sectoral variations reveal divergent trends that require attention. This article delves into the underlying factors, country-specific dynamics, and sectoral shifts that characterize this evolving credit landscape.

Marginal Increase in EU Banks’ NPL Ratios in Q3 2024

Scope Ratings' analysis of EU banks’ non-performing loan (NPL) data for Q3 2024 highlights a slight uptick in the consolidated NPL ratio to 1.88%, up from 1.86% in the previous quarter. This increase translates to an additional €2.7 billion in NPLs, bringing the total stock to €376 billion. Corporate exposures were the primary contributors to this rise, particularly in sectors such as administration, wholesale and retail trade, and manufacturing.

While the aggregate ratio remains historically low, the commentary anticipates moderate deterioration in asset quality over the coming quarters. This outlook reflects ongoing challenges in the corporate sector but acknowledges mitigating factors like easing monetary policy that may limit downside risks to banks’ credit profiles.

Country and Sectoral Divergences

The NPL trajectory is far from uniform across EU member states or sectors. Significant increases in corporate NPL ratios were observed in Belgium, Germany, Austria, Finland, France, and Sweden. In contrast, eurozone periphery countries like Greece and Italy continue to exhibit improving NPL trends, albeit at a slower pace than in previous quarters.

Sectorally, the largest NPL ratio increases occurred in administration, which rose from 2.5% to 2.8%, wholesale and retail trade (4% to 4.3%), and manufacturing (3.7% to 3.9%). Despite these upticks, the real estate sector—the largest component of EU loan portfolios—showed remarkable stability, with an NPL ratio steady at 2.7%.

Cost of Risk and Stage 2 Loans

Another key indicator of asset quality, the cost of risk, declined slightly at the EU level in Q3 2024. Significant reductions in provisioning costs were noted in Germany and Austria. Meanwhile, the proportion of Stage 2 loans—an indicator of loans at heightened risk of default—improved slightly to 9.2% overall. However, countries like Austria and Denmark recorded rising Stage 2 ratios, reflecting localized pressures.

Looking Ahead

Scope Ratings underscores that the marginal rise in NPL ratios does not yet pose a systemic risk to EU banks, given their robust capital buffers and improving cost of risk trends. However, economic fragility in the corporate sector and country-specific vulnerabilities warrant close monitoring. In particular, continued stability in the real estate sector and easing monetary conditions are expected to counterbalance further asset-quality erosion.

Conclusion

Scope Ratings’ Q3 2024 heatmaps illustrate a nuanced picture of EU banks’ asset quality, combining overall resilience with pockets of rising risk. As banks navigate these challenges, the outlook for NPLs hinges on macroeconomic conditions and sectoral performance. Policymakers and financial institutions alike must remain vigilant to ensure that localized stress does not escalate into broader credit instability.

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Relevant Links:

https://scoperatings.com/ratings-and-research/research/EN/178265

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