Non-performing loans: Getting to grips with bad debts

Levels of non-performing loans (NPLs) are still high in some parts of Europe, placing pressure on banks’ balance sheets. However, investor appetite is growing for non-performing assets.

In the decade since the start of the financial crisis, the European banking sector has worked hard to come back from the brink. Banks have deleveraged and increased their capital ratios, and following the establishment of the European Banking Authority, they are contending with tighter regulations.

However, non-performing loans (NPLs) are still a serious issue across the eurozone, placing pressure on banks and draining their profitability. NPLs are normally defined as loans that are more than 90 days overdue, or those that are unlikely to be repaid in full.

According to the European Central Bank, Europe’s NPL ratio stood at 4.81% in Q1 2018 (looking exclusively at ‘significant institutions’ in the euro area). Another key statistic comes from the European Banking Authority’s (EBA) Risk Dashboard, which bases its data on a sample of large banks. As of the end of 2017, it calculated the EU’s NPL market as €813bn, or 4% of the total loans market.

From one perspective, these figures are heartening. The equivalent ratio was 6.5% at the end of 2014, and 8% at the peak of the crisis, meaning levels of problem loans have fallen significantly. However, the EU has some way to go before it can compare with the US and Japan, where the ratios are close to 1%. It is also far removed from its own pre-crisis levels of 2%.

“The EU’s NPL market is a key concern for policy makers, central bankers and financial institutions,” Thanos Papasavvas, founder and CIO of ABP Invest, tells EMEA Finance. “Furthermore, the significant divergence between member states’ NPL ratios highlights regional issues and potential systemic concerns.”

Indeed, a more granular look at the data reveals wild inconsistencies across the continent. According to the EBA Risk Dashboard, many countries have good NPL ratios – as of March 2018, Finland’s stood at 1.5% and Luxembourg’s at 0.7%. Other strong performers include the UK, Germany and Sweden. The overall average, however, is skewed by certain outliers.

Read the rest of this article in the October-November 2018 edition of EMEA Finance (subscriber only)