Record-low bad loans mask uneven credit risks in emerging Europe

• Average non-performing loan (NPL) ratio in central, eastern and south-eastern Europe falls to historic low of 1.86 per cent
• However, NPL volumes rise for the first time in recent years, signalling more uneven credit risk dynamics
• Commercial real estate, construction and SME portfolios remain key areas of supervisory focus

Non-performing loan (NPL) levels across the regions covered by the European Bank for Reconstruction and Development’s (EBRD) NPL Monitor remain near all-time lows, reflecting the resilience of banking sectors despite a challenging economic environment. However, the latest edition of the NPL Monitor highlights growing divergence across countries and sectors, suggesting that credit risks are becoming increasingly uneven.

The report finds that in the central, eastern and south-eastern Europe (CESEE) region, the stock of NPLs reversed the declining trend of recent years, increasing by 4.5 per cent to €28.6 billion in the year to December 2025. Despite this, the average regional NPL ratio fell to a new low of 1.86 per cent as loan growth outpaced the rise in impaired exposures.

The overall coverage ratio in the region edged down to 62.7 per cent, a fall of 1.5 percentage points from the end of 2024, reflecting softer provisioning buffers in some markets.

While headline indicators remain strong, underlying trends reveal a more complex picture. Differences in economic performance, sectoral exposures and policy responses are driving increasingly divergent outcomes across countries. Some countries, including Hungary, Romania and Slovenia, recorded notable increases in NPL volumes, while several other markets continued to see improvements in asset quality.

In European Union countries within the central and eastern Europe region, the share of Stage 2 exposures declined sharply to 8.5 per cent by the end of 2025 from 10.4 per cent a year earlier. Stage 3 loans remained broadly stable at around 2.0 per cent, but the report notes that Stage 2 portfolios continue to warrant close monitoring for credit deterioration amid ongoing economic uncertainty.

Sectoral risks remain concentrated in specific areas of the economy. Commercial real estate (CRE) continues to show signs of stress, while the construction sector records the highest NPL ratio. Small and medium-sized enterprises (SMEs), particularly those operating in export-oriented industries, remain vulnerable to geopolitical tensions and trade-related uncertainty. Consumer lending also warrants continued monitoring.

The NPL transaction market is also evolving. The broad-based deleveraging activity that characterised previous years is giving way to a more selective environment, with increased use of smaller targeted transactions, forward-flow arrangements and secondary market trades.

In the euro area, supervisory priorities remain focused on forward-looking credit risk assessment and early intervention. The European Central Bank (ECB) continues to focus on lending standards, non-performing exposure (NPE) coverage and emerging risks in CRE, SME lending and interest-only mortgages. Supervisors are also paying increasing attention to the growing private credit market and links between banks and non-bank financial intermediaries. From 2026, the ECB will introduce changes to its NPE framework, including multi-year coverage expectations for significant institutions and a more harmonised approach to legacy NPEs among less significant institutions.

Although the NPL Monitor regions – comprising 17 CESEE countries and selected non-CESEE markets – have so far avoided a significant deterioration in asset quality, the report warns that the risk of renewed NPL accumulation remains. Ongoing geopolitical tensions, global trade fragmentation and weaker growth prospects continue to weigh on many of the CESEE region's small and open economies. In this environment, early identification of credit stress, targeted supervision and timely resolution of distressed assets will remain essential.

The EBRD’s NPL Monitor is a semi-annual publication under the Vienna Initiative’s NPL Initiative. It is published on the Vienna Initiative’s website, as part of the Initiative's ongoing work to monitor asset quality trends and support financial sector resilience across the region.

The Vienna Initiative was established in 2009 during the global financial crisis with the aim of safeguarding the financial stability of emerging Europe by bringing together banks, governments, regulators and international financial institutions.