In the fourth quarter of 2020, the share of bank loans considered ‘underperforming’ or in stage 2, rose to “9.1%”, showing an increase of 110 basis points quarter on quarter, the European Banking Authority (EBA) noted in the latest edition of its Risk Dashboard, which it published on Wednesday 31 March.
While the number of households or non-financial corporations (NFCs) unable to repay their loans remains limited, the European authority notes that the “sectors most affected by the pandemic, such as accommodation and restaurants, or arts, entertainment and recreation, already show signs of asset quality deterioration”.
In the fourth quarter of 2020, the ratio of non-performing loans (NPLs, phase 3) increased for these troubled sectors. However, due to an improvement in the situation of other economic sectors, the ratio of NPLs to total outstanding bank loans decreased at the end of 2020, stabilising at 2.6%.
In the short term and until the pandemic is under control, the EBA believes that banks will remain “vulnerable” to adverse credit risk movements, especially in sectors involving social contacts. It calls for a coordinated and gradual lifting of fiscal support measures (government guarantees, repayment moratoriums, tax breaks) to prevent a sudden and insurmountable ‘cliff effect’ in NPL lending, which would have a negative impact on the banking sector.
The banking industry, it adds, must nevertheless continue to analyse its credit portfolio rigorously and act proactively to anticipate and address any deterioration in bank asset quality.
Finally, the EBA notes that the profitability of the sector remains very low and, with the containment measures related to the Covid-19 pandemic, the risks of cyber-attacks, phishing, money laundering and fraudulent practices are significant.
See the EBA Risk Dashboard: https://bit.ly/3fs4JJh
EESC criticises Commission’s NPL Action Plan
In an opinion adopted on Thursday 25 March, the European Economic and Social Committee (EESC) criticised the Action Plan for NPLs that the European Commission presented in December 2020 (see EUROPE 12624/5, 12622/21).
In the Committee’s view, loans that became non-performing before the pandemic should be differentiated and treated differently from those that became non-performing as a result of Covid-19. As regards the creation of asset management companies (‘bad banks’) to which banks would transfer their NPL loans, the EESC believes that this solution should remain an exception, preferring bilateral agreements between the credit institution and the borrower.
For more information: https://bit.ly/2QIQllp (Original version in French by Mathieu Bion)