Hot market of real estates and growth of the mortgage loans can cause a high risk of increase in non-performing loans (NPLs) in Europe, warns the consulting company Deloitte in a report, based on the data from European central bank (ECB).
The real estate market, especially the house market, is booming among the COVID-19 pandemic. The prices of apartments and houses have increased as a result of higher demand for more space in homes, driven by lockdowns and work-from-home. In combination with low interest rates, this could lead to a housing bubble, which poses a risk to the quality of loan portfolios, noted the report.
At this moment NPLs in Europe are at the lowest level for the last decade, but bankers warn that there may be hidden signs of asset quality deterioration such as the share of forborne loans and problematic stage 2 loans – loans, which have experienced a significant increase in credit risk. In the first quarter of 2021 the ratio of this type of loans increased to 9%, 2 percentage points above the level at the same period of 2020. Banks might see a larger future increase in these stage 2 loans (under-performing) and NPLs (stage 3) due to moratoria and government support becoming thinner. In order to tackle these probable defaults in the next period, European banks may be required to adjust their provisioning models to cover higher expected credit losses, consider the experts of Deloitte.
According to Eurostat data, in the second quarter of 2021 housing prices increased by 6.8% in the euro area and by 7.3% in the EU, compared with the same quarter of 2020. This is the highest annual increase for the euro area since the fourth quarter of 2006 and since the third quarter of 2007 for the EU. In Bulgaria prices are also increasing significantly, but for certain types of properties – apartments in the big cities as well as rural houses in some areas, suitable for “digital nomads”. The average price increase in Bulgaria is above 9%, according to Eurostat data (see the chart).
All measures that were implemented during Covid-19 pandemic might have set the stage for a housing bubble in some European countries, noted the Deloitte report. Recently, the Head of ECB banking supervision, Mr. Andrea Enria mentioned that the ECB is “keeping a very close eye on the build-up of risks on banks’ balance sheets”. He also warned that the ECB is also “seeing a build-up”of residential real estate vulnerabilities in some countries. He added that even though non-performing loans numbers still seem favourable, the quality of assets held by banks are deteriorating and current bank projections for NPLst might be too optimistic in the current context and releasing provisions shall be cautious.
Deloitte reassures that in comparison to the 2007-2008 crisis, banks are more prepared to tackle these situations as capital ratios are at high levels due to regulatory reforms since the previous crisis, but also due to extraordinary provisions accumulated in 2020 for the COVID pandemic, however caution remains essential during these uncertain times.
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