European NPE stocks are continuing the downward trend registered in 2020 on the back of persisting support measures, such as state guarantees and moratoria. The COVID-19 effect has not been registered so far, but banks and regulators are preparing for an increase expected in the next couple of years when economic stimulus packages will begin to reduce on the back of growing national debt and accelerating inflation.
NPE stocks declined by 61.8 percent since September 2015, with new defaults from COVID-19 expected to materialize later in 2022–2023.
European NPE stocks are continuing the downward trend registered in 2020 on the back of persisting support measures, such as state guarantees and moratoria. The COVID-19 effect has not been registered so far, but banks and regulators are preparing for an increase expected in the next couple of years when economic stimulus packages will begin to reduce on the back of growing national debt and accelerating inflation.
Substantial upgrade in asset quality since 2015.
The NPE volume in EU banks decreased further to EUR419 billion in September 2021, from EUR510 billion the previous September. This drop was primarily driven by increased NPE sales and securitizations with limited visible effects of COVID-19 on asset quality in 2021.
Average asset quality is improving across all the segments.
As of September 2021, average asset quality is improving across all segments, in particular for mortgages and CRE, with both segments improving year-on-year by approximately 25 percent. The SME and mortgage loan segments remain the largest sub-segments by volume.
The NPE coverage ratio reduced marginally in the 12 months before September 2021.
The NPE coverage ratio has decreased slightly compared to September 2020 due to a more promising outlook driven by an overall resilient economy and positive expectations for COVID-19 in 2022 that would avoid additional lockdowns.
The forbearance ratio remained stable over the same period, and the danger rate will need to be closely monitored in the upcoming quarters.
The potential deterioration of stage 2 exposures toward the NPL bucket will be a crucial factor in tackling non-performing inflows in the COVID-19 aftermath. As mentioned in the previous section, the Regulator is keen on remaining vigilant on early monitoring policies and to discourage rash reductions in coverage ratios.
Uncertainty persists due to the unknown impact of the crisis as well as additional risk factors from geopolitical tensions and inflation.
The COVID-19 effect has been muted so far, but emerging risk factors, such as inflation and geopolitical tensions, are impacting commodity prices in the EU. The combination of these different factors could materially increase operational expenses for corporates and reduce domestic demand. It is expected that the increase in defaults from the change in the economic cycle will be partially offset by medium-term funding. For example, the Next Generation EU and EU Recovery Fund that will finance large-scale projects in the region for years to come.
For details on the European financial market and its impacts on the NPE market, download the full report.
