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New NPL Monitor: bad debts in emerging Europe fall again

By Svitlana  Pyrkalo

  • NPLs hit a new record low in CESEE, reports EBRD-led NPL Monitor
  • Largest declines of bad debt in Latvia, Croatia, Bosnia and Herzegovina and Poland
  • No material asset quality deterioration, but macro environment still challenging

Bad debt has continued to decline in the EBRD’s European markets despite the economic tumults of the past years, finds the new edition of the NPL Monitor, published today.

In a continuation of the trend of the first half of 2022, non-performing loan (NPL) stocks in central, eastern and south-eastern Europe (CESEE) have once again hit their lowest levels since the NPL Monitor was first published in 2016.

In relative terms, the decline in NPL stocks was most significant in Latvia, Croatia and Bosnia and Herzegovina, where they fell 20.9 per cent, 20.8 per cent and 19.1 per cent, respectively. In absolute terms, the largest contributor to the decline was Poland, where the stock of NPLs declined by €8.4 billion, or 14.8 per cent.

The report states: “The banking sector in the European Union (EU) and the broader central, eastern and south-eastern European (CESEE) region has remained stable and resilient. On the whole, banks’ asset quality in the region has not yet shown meaningful signs of deterioration, despite the end of unprecedented levels of Covid-19 government support and the challenging macroeconomic environment.”

However, it warns against complacency, since vulnerabilities remain in most CESEE countries.

Persistent macroeconomic pressures, including high inflation and interest rates, combined with low economic growth prospects in many jurisdictions, are contributing to stress in many asset classes.

Other findings of the report include the following:

  • At the regional level, NPL volumes fell 10 per cent to €27.4 billion in the 12 months to 31 December 2022.
  • As of December 2022, the average regional NPL ratio (the proportion of NPLs to total gross loans) across the CESEE region decreased to 2.3 per cent – a reduction of 0.4 percentage points over the 12-month period, setting a new low for recent years.
  • On aggregate, in the CESEE region, the average NPL coverage ratio (percentage of NPL provisions divided by the NPL stock) increased 1.8 percentage points to 65.2 per cent between December 2021 and December 2022.
  • The gap between stage 2 and stage 3 loans in the EU-11 (the newest member states) continued to widen during 2022. The increase in stage 2 loans and the diverging move in NPLs suggest that rising levels of borrower distress could translate into fresh pressures on asset quality in the banking sector.
  • Elsewhere in the region, Ukraine experienced an increase in NPL volume of €11.6 billion (2.3 per cent), while in Cyprus and Greece NPLs continued to decrease. NPL volumes in Greece fell by €13.9 billion (28.1 per cent) over the period, mainly due to a high volume of NPL securitisation deals under the Hercules Asset Protection Scheme (HAPS), which was extended to October 2022.

The half-yearly report tracking NPLs has been prepared by the EBRD as part of the European Bank Coordination “Vienna” Initiative framework. NPL Monitor is published on the Vienna Initiative website, alongside the partner publication prepared by the IMF: the Deleveraging and Credit Monitor, which is also being issued today.

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

NPL Monitor - H1 2023

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