Massive state intervention prevented a rise in non-performing loans (NPLs) during the Covid-19 pandemic in central, south-eastern Europe (CESEE), but the quality of bank assets after the phasing out of measures “remains uncertain”, according to the latest NPL Monitor.
The semi-annual Monitor is published by the Vienna Initiative comprising the European Commission, the European Central Bank, EIB, EBRD, IMF and the World Bank.
The report finds a decline in the NPL ratio throughout 2020, as the decrease in NPLs exceeded the decrease in loans and advances.
As of 31 December 2020, the region’s NPL ratio remained relatively stable compared with the previous year, at 3.5%, down 0.2 percentage points from the end of 2019.
But while the worst-case scenario “is now unlikely to materialise”, NPLs are still expected to rise as government measures begin to be withdrawn”.
While the extent remains to be seen, the Monitor warns the recent rise in loans with significantly higher credit risks since initial recognition (stage 2 loans) “can be seen as an indicator of intensifying credit risks in future”.
Economies reliant on sectors most vulnerable to the crisis – such as accommodation and food, arts and entertainment, commercial real estate or transport – are also likely to be particularly affected.
In addition, the widespread use of payment moratoria and other forbearance measures “creates additional risk-monitoring challenges for banks, putting them under accrued pressure”.
“We are encouraged by the findings of the latest NPL Monitor, but it is clear that we are not out of the woods yet,” said Pierre Heilbronn, EBRD Vice President, Policy and Partnerships.
“The report sends a clear warning of the dangers ahead. This makes the support of a robust and sustainable recovery all the more important,” he added.
The report also found that at a regional level, NPL volumes fell 3.9% in the 12 months from Q4 2019 to Q4 2020 and similar to the trend in NPL volumes, NPL ratios continued to decrease in 2020 in all but five countries in CESEE.
On aggregate for the region in 2020, the NPL coverage ratio showed a slight improvement of 0.3 percentage points, supported by prudent provisioning in the context of Covid-19 and the slight decrease in NPLs.
According to the European Banking Authority, the overall share of stage 2 loans in the European Union rose to 9.1% of total loans in the last quarter of 2020, with stage 2 loans as a share of loans still under moratorium nearly triple that (26.4%).
The Vienna Initiative countries where the share of stage 2 loans increased most throughout 2020 were Hungary, Poland, and Romania.