Vienna Initiative: Stable NPL ratios and risk of weakening borrower affordability

NPLs — Mortgage rates business concept of investment housing real estate interest rates

Levels of non-performing loans (NPL) have remained largely stable across the EU and the banking system of Central, Eastern and Southeastern Europe (CESEE), notes the latest Vienna Initiative Report. The report covers the first half of 2025 (H1) and according to it, NPL ratios continue to trend downward in most countries of the region.

Volumes saw a pronounced annual reduction, declining by 4.4% in the 12 months leading up to the end of December 2024 to reach EUR 26 billion. The average NPL ratio for the region fell by 0.2 percentage points to a new low of 1.9%, dropping below the 2% threshold for the first time since the global financial crisis.

This overall positive trend reflects both improved credit quality and proactive management by the banking sector, notes the Report. Most CESEE countries experienced a decrease in their NPL ratios, with Poland and Hungary showing particularly significant drops in NPL volumes. However, some countries, like Romania and Estonia, saw marginal increases in their NPL ratios. The persistent low level of NPLs is supported by banks’ active approach to early recognition and disposal of impaired loans, mainly through the sale of smaller portfolios.

Bulgaria – above the average

According to data from the end of 2024, Bulgaria had an NPL volume of EUR 1.9 billion. The NPL ratio was 3.2% as of December 2024, a 0.5 percentage point decrease from December 2023. The NPL coverage ratio stood at 49.4%, showing a slight decline of 0.1 percentage points over the same period. Compared to the average of 1.9%, Bulgaria’s ratio is above CESEE average, without change in the last years.

Stage 2 exposures remain elevated in several markets in CESEE, says the Report. These are credit exposures in risk, but not yet overdue by more than 90 days.

View EN_The VIenna Initiative_NPL Monitor_H1_2025 on Beautiful.ai

Alert for deterioration

Despite this resilience, supervisors remain vigilant due to early signs of asset quality deterioration, such as sector-specific shocks and weakening borrower affordability. While the region has so far avoided a sharp deterioration in credit quality, the risk of an NPL build-up remains, warns the Report. Continued vigilance, proactive supervision and enhanced transparency will be essential to support the timely identification and resolution of distressed assets, according to Vienna Initiative Experts.

Persistent cost-of-living pressures are accentuating demand for short-term consumer credit, leading to increased scrutiny by supervisors of banks’ affordability and origination standards to mitigate the associated increased risks. NPL market activity showed moderate acceleration in 2024. Secondary sales and forward-flow deals are gradually re-engaging investors. However, some less mature markets are still being impacted by legislative barriers and regulatory fragmentation – which continues to reflect on investor demand and pricing.

European banks: Risks of Mortgages and Property Prices

According to the last Deloitte Property Price Index Report, the European residential real estate market is in a phase of rebalancing, facing challenges like rising living costs, high interest rates, and housing supply shortages, shows the report. The health of the banking system is intricately tied to this market, with the primary risks stemming from mortgage markets, loan performance, and the correlation between property prices and credit markets. A key indicator of a banking system’s stability, NPLs, can rise when economic conditions make it difficult for borrowers to repay their debts, tying up bank capital and hindering new lending, warn the experts.

Interest rates are a significant factor shaping the residential market. In 2024, many central banks maintained tight monetary policies to combat inflation, keeping mortgage rates relatively high. This created affordability challenges, particularly for first-time homebuyers and those with variable-rate loans. While some rates began to ease by the end of 2024, borrowing remained cautious, and lenders applied stricter criteria focused on creditworthiness and long-term sustainability, according to the Deloitte Report.

Bulgaria is among the countries with lowest interest rates of the mortgages: 2.83%, in line with Croatia (2.86%) and Turkey (3.01%). Belgium, Luxembourg, Spain and France also remain below the 3.5% threshold. The average rate for the whole of Europe is 4.36%, which represents a slight decrease compared to 2023 and reflects the gradual easing of monetary policy in a number of countries.

In countries like Hungary the average mortgage interest rate reached as high as 9.35% in 2024. Other countries with rates exceeding 5% included Poland (7.67%), Romania (6.89%), Norway (5.66%), Albania (5.26%), and the Czech Republic (5.07%).