European Non-Performing-Loans

Non-performing loans of EU/EEA banks continued to increase to EUR 364.9bn, according to the EBA’s 4 April Risk Dashboard showing data to the fourth quarter of 2023. But the increase (EUR 2.2bn quarter on quarter; EUR 7.5bn year on year) was barely noticeable relative to the consolidated EU-level NPL ratio, which increased from 1.81% to 1.85%, close to its historical low of 1.75% in March 2023.

While the increase was moderate, it nonetheless still represents a reversal of the long-term trend of asset-quality improvement. And even though we are forecasting a modest economic rebound in the second half of 2024 aided by expected rate cuts, NPL formation will likely continue rising moderately this year because of a time lag.

The situation differs among countries. Germany (+EUR 4bn) and Austria (+EUR 1.8bn) suffered the largest NPL increases of Q4 2023 even if the deterioration was contained and NPL ratios only reversed to their December 2019 levels. This contrasts with continuing improvements in the Netherlands (-EUR 1.2bn) and Italy (-EUR 1.7bn).

Overall, the increase of NPLs stemmed mainly from corporate exposures. Retail exposures have so far been resilient to the current economic slowdown. The largest increase in retail NPL ratios was in Finland and Sweden. In the Netherlands and Italy, a reduction in retail NPLs contributed to the overall improvement, suggesting the trend is broad based. We note that the Netherlands saw the biggest rise in Stage 2 loans, although this is down to more stringent classification triggers.

We do not see a general deterioration of NPL ratios by corporate sector nor a concentration of issues in specific sectors. Exposure to real estate and construction has been a source of problem loans and remains an area of concern. The construction sector appears most frequently among the Top 3 sectors with the largest NPL ratios across countries.

NPL ratios across ‘Other EU/EEA countries‘ is not materially different, with a moderate increase in some countries (Luxembourg, Norway) and a continuing improvement in 11 countries, especially Greece, Ireland and Portugal.

Spanish situation

Spanish banks have shown historically higher NPLs compared to other EU countries, mainly because the sector is still carrying a relatively high NPL stock from previous crisis compared to other EU countries. 

If we look back to 2019, the only country with NPLs above Spain was Italy, which was behind other countries in terms of active sales of NPLs portfolios. After speeding up the level of NPL sales, Italy has been able to reduce its NPLs stock to levels below Spain. Spain remained second in terms of NPL stocks by YE2023 (EUR 77bn) after France (EUR 117bn).

While we expect Spain to continue to be active in reducing legacy NPL stocks, we also observe a sector dynamic that has intrinsically higher NPLs compared to other countries. The Covid-19 pandemic affected the country in core sectors (tourism, services, transportation), which are also related to SMEs that have a higher vulnerability to downturns compared to larger corporates. This places Spain under a systematically higher NPL component compared to other EU countries.