European banks register ‘material’ increase in problem loans for sectors affected by pandemic

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As the European banking sector sees a significant reduction in problem loans, the European Banking Authority has raised concerns about banks’ exposure to the hospitality and leisure sectors, where NPL ratios are rising.

The average NPL ratio of European banks fell to 2.3% at the end of the second quarter from 2.9% a year earlier, a development supported by several large divestments and securitizations of NPL in economies such as the Italy and Greece, according to the EBA’s annual risk assessment and transparency exercise, which covered 120 banks in 25 countries of the European Economic Area.

Click here to access the EBA transparency exercise template in the S&P Capital IQ Pro template library.

Greek banks posted an average NPL ratio of 14.8% at the end of the second quarter, down from 30.3% a year earlier, while the NPL ratio of Italian banks fell to 3.7% from 6.1 %. Portuguese and French banks also made a substantial contribution to the reduction, EBA found.

The average bad debt coverage ratio decreased from 45.5% to 44.3% due to an approximately 18% year-over-year decrease in accumulated impairments and provisions for problem loans.

Hospitality takes over

Despite the generally positive developments, the EBA exercise revealed deterioration in the segments most affected by the pandemic, particularly the hospitality and leisure sectors, where reported NPL ratios have “significantly increased”.

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The average NPL ratio in Europe in the accommodation and food services sector rose to 9.7% from 7.8% a year earlier. Banks in Cyprus, Greece, Croatia and Malta are the most exposed to these activities, according to EBA, with more than 10% of their loans and advances to non-financial companies belonging to this segment.

The average ratio of NPL for the arts, entertainment and recreation sector fell from 6.8% to 8.2%, although the EBA said that exposures in this segment are generally low in the region.

Loans benefiting from pandemic-related support measures are also “a source of potentially growing risks for EU banks,” EBA said, adding that a growing share of these loans are classified as stage 2. or as NPL.

Stage 2 refers to loans that have experienced a significant increase in credit risk but have no objective evidence of impairment. The share of phase 2 loans that have benefited from moratoriums is “particularly high” at 25%, while for public guarantee schemes this figure is 18.5%, EBA said.

Despite the reduction in NPL volumes, the average ratio of Greek banks was still high relative to the rest of Europe at the end of the second quarter. Alpha Services and Holdings SA, Piraeus Financial Holdings SA, Eurobank Ergasias Services and Holdings SA and National Bank of Greece SA ranked among the individual institutions with the highest ratios compared to their peers.

The lowest NPL ratios were recorded by three Swedish banks, Svenska Handelsbanken AB (publ), Swedbank AB (publ) and Skandinaviska Enskilda Banken AB (publ).

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