NPL in Europe decrease amid the deteriorating economic outlook

Slight decrease in the non-performing loans (NPL) – despite deteriorating economic outlook, shows the latest report Risk Dashboard (RD), prepared by the European Banking Authority (EBA). NPL ratio fell just below 1.8% and their volume decreased by 1% in the third quarter of 2022 compared to the second quarter. 

The NPL ratio for household exposures remained unchanged – 2.2% at the end of September. Exposures of non-financial companies recorded a slight decline of 0.1 percentage points to 3.3% overdue loans. With the same step is the reduction in the commercial real estate sector, where the share of NPL is 4.1% (see the chart). 

The data points to the possibility for an increase of NPL, but the bank system looks stable. Stage 2 loans were 9.5%, which is above the pre-pandemic level, but their share remained unchanged in the third quarter. These types of loans are defined as risky, with a small delay in payments, but still not non-performing. According to the rule of European banks non-performed are loans with at least 90 days of delay payment. Stage 2 loans could become regular again, or they could move to overdue.

According to RD the outlook is deteriorating but credit risk indicators remain benign. High inflation could have a substantial impact on more vulnerable firms and households. The volatility in energy and commodity prices might severely affect energy-intensive sectors. In case of a recession, debt sustainability concerns might be accentuated. 

National housing indices already show declines in some countries. Early detection of debtors and exposures in distress, adequate provisioning policies, and timely recognition of loan losses remain important and should be monitored closely, recommend from EBA.

Banks have increased their exposures in the third quarter of the year. Total loans increased by 1.9% in the third quarter of 2022. Loans toward non-financial corporates, and in particular to larger corporates have been the main driver of the increase. Mortgage loans remained mostly flat , with a minimum change on a quarterly basis. Banks increased further their exposures towards energy companies – electricity, gas, steam, and air condition supply. The increase is  more than EUR 24 billion, just for a quarter, which is an 8% rise.  

Banks currently have sufficient liquidity buffers, but face increased wholesale funding costs, i.e. from sources, providing a resource only for financial purposes. After a quieter period earlier in the year, primary wholesale funding markets have been very active again. The recent and upcoming central banks’ interest rate increases and expectations about the economic trajectory are likely to further increase wholesale funding costs.

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