The risks are growing due to a combination of higher borrowing costs, surging inflation and stagnated incomes 

The non-performing loans (NPLs) of the European banks remain below 2% of the total European loan stock, shows the latest data of the European Central Bank (ECB) as of end-June. The data includes all banks with headquarters in the EU member states.

As of June, 2023, the NPL ratio stayed almost unchanged compared to the same period of the previous year – 1.88%. In comparison to the first quarter of 2023 there was a very slight increase – 0.05 percentage points, after already in September 2022, it fell to its lowest level since the ECB’s statistics have been recorded, i.e. at least since early 2015.

The rise of the interest rates and the growing risk of economic recession in the EU hasn’t affected the credit portfolio quality to the moment. With the latest increase in September, the ECB’s key interest rate reached 4%, all-time high since issuing of the single currency, where it was brought through unprecedented 10 consecutive hikes, starting from negative level – minus 0.25%. The aim of the institution was to constrain the high inflation in the euro area. 

With the slowing pace of growth in the prices of basic goods and services and signs of a worsening economy, the ECB’s key interest rate is expected to remain at current levels, according to a Financial Times analysis. The combination of s record high interest rate, surging inflation and declining gross domestic product is leading to a rise in NPLs. This is confirmed by this year’s European Consumer Payment Report, according to which over a third of Europeans (35%) have failed to pay at least one bill on time in the past 12 months – the highest proportion since 2019. Soaring inflation and rising borrowing costs are a problem for households in Europe, whose real incomes are stagnating and even declining, the report’s authors warn (read more 👉 here). 

In Bulgaria, the NPL stock in the banking sector continues to be above the EU average. NPL volumes among mortgage loans are the least while the ones within the consumer and corporate loans are higher. According to data from the supervisory board of the BNB, as of end-September, 2.37% of all loans were 90 days past due. A further 1.44% were underperforming for a shorter period. A rule of thumb is that, the longer a loan is past due, the less likely it is to return from underperforming back to a performing one.

The NPl ratio in the corporate sector is 3.28% of the total loan stock, and in the case of households, the ratio is nearly 1 percentage point less. The NPL stock has steadily decreased in the last few years due to several factors, but predominantly because of the sale of portfolios to debt purchasing and debt collection companies and write-offs (see chart). In the case of consumer loans, the NPL ratio exceeds 4%. In reality, the NPL volumes are even higher if one looks at the results on a group level, as some banks have outsourced their consumer lending divisions to non-bank financial companies. Thus, the data from them is not included in the overall bank statistics, but is assigned in the one of the non-bank lending.

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