2015 NPL levels in CESEE falling, but remain high

By Axel  Reiserer


Vienna Initiative publishes its NPL Monitor for the CESEE 2H 2016

The NPL Monitor for the CESEE 2H 2016, newly published by the Vienna Initiative, highlights some positive improvements in reducing levels of non-performing loans (NPLs) and developing solutions to better resolve NPLs in central, eastern and south-eastern Europe (CESEE), while also highlighting the scale of the challenges that remain.

As of 31 December 2015, NPLs amounted to €55.5 billion in the region as whole, which equates to around 5.1 per cent of GDP or 7.7 per cent of gross loans in the 18 countries covered by the survey. A further €129.2 billion in NPLs were recorded in Cyprus, Greece and Ukraine as at 31 December 2015.

According to the latest data from the International Monetary Fund the volume of NPLs decreased substantially in 2015 in CESEE, by 6.5 per cent (or €3.9 billion) compared with December 2014. Improvements were mostly attributable to a decreased stock of NPLs thanks to sales (for example, in Hungary and Slovenia) but also to other factors such as the introduction of new legislation (for example in Albania).

The secondary NPL market remained relatively stable for the region, with approximately €6 billion in NPL transactions realised over the last 18 months and comprising over €2 billion in the first half of 2016 alone.  

Significant progress has also been achieved in understanding the roots of the NPL issue and in contributions to defining and implementing solutions. International financial institutions, national regulators and the banking industry continue to work together closely and successfully. For example, the European Central Bank has published guidance on NPLs (under public consultation until 15 November 2016) to serve as a basic framework in Europe. And as part of the Vienna Initiative, the EBRD launched a new NPL Initiative website dedicated to the issue in September 2016.

Despite these improvements, NPL ratios remain persistently high, exceeding 10 per cent in 10 of the 18 CESEE countries. Full resolution of the burdensome NPL issue in the region remains a significant challenge. European and national regulators, in cooperation with the industry, must continue their efforts to overcome the remaining obstacles to NPL resolution and sales and to develop robust safeguards against new NPLs.

Key highlights from the NPL Monitor for the CESEE 2H 2016

The steepest year-on-year reductions in NPL volumes were registered in Hungary (€2.6 billion or 33.5 per cent), Slovenia (€0.9 billion or 22.1 per cent) and Albania (€0.2 billion or 19.6 per cent). Year-on-year increases in NPL volumes were recorded in Romania (1.4 per cent), the Czech Republic (1.7 per cent), FYR Macedonia (4.7 per cent) and Bulgaria (20 per cent).

However, the NPL ratio (measured as the proportion of NPLs to total gross loans and advances) on a country-by-country basis continues to vary greatly, ranging from a low of 1 per cent in Estonia to a high of 21.6 per cent in Serbia. Bulgaria, Albania and Croatia recorded NPL ratios of 20.6, 18.2 and 16.3 per cent, respectively.

Three countries saw increases in their NPL ratios: Latvia recorded a marginal increase of 0.04 per cent, while Bulgaria and Serbia recorded increases of 3.9 and 0.1 per cent, respectively. These three countries accounted for 18.2 per cent of all NPLs in the region while accounting for only 8.7 per cent of total gross loans.

Across the region the NPL coverage ratio (measured as the proportion of specific loan loss provisions to NPLs) increased from 59.4 per cent in December 2014 to 60.9 per cent in December 2015. On a country-by-country basis, Kosovo, FYR Macedonia and Latvia had the highest NPL coverage ratios with 90.5, 86.7 and 77.8 per cent, respectively.

The countries with the lowest NPL coverage ratios in December 2015 were Lithuania and Estonia at 33.8  and 29.2 per cent, respectively. The risk associated with this lower coverage is mitigated by the fact that both countries have relatively low NPL ratios of 5.7 and 1 per cent, respectively.

Bulgaria, Montenegro and Romania are some of the most vulnerable countries, with higher NPL ratios and lower NPL coverage ratios than the averages recorded for the CESEE region.