One area where it has been easy to be wrong, is the path of non-performing loans in the European banking system. Against a backdrop of a global pandemic, NPLs have stubbornly continued their downtrend to reach a historic low of 2.1% (EBA number as of Q3 2021).
Even issuers have been positively surprised around asset quality trends, exceeding early expectations. At the end of 2020 Erste expected its NPL ratio to rise to 3-4% in 2021 from 2.7%, instead it dropped to 2.4%. Erste is no outlier. The billions of loan loss provisions set aside for Covid-19 have been partly released (albeit some have been rolled into other management overlays) as actual losses have failed to materialize.
So why has the base case of a significant (but manageable) rise in NPLs not materialized?
-> A lot of losses have been taken off banks’ balance sheets driven by significant easing on all fronts (fiscal, monetary, etc.) – through government guaranteed loans offered to corporates and income replacement measures for individuals (furlough schemes etc.)
-> Appetite for NPL sales has remained robust, with peripheral banks continuing to de-risk their balance sheets, Greek banks’ NPL ratio is now down to 10.5% in Q3 2021 (vs. 35.2% pre-pandemic)
-> The economic rebound has been strong, which has further helped absorb the shock (unemployment rate below pre-pandemic levels in the EZ etc.)
Looking forward, it seems as though the NPL bulldozer is unlikely to materialize. Looking at moratoria data (the large majority having expired), asset quality has held up reasonably well (NPL ratio of just below 5%) and NPLs are only slightly higher on non-expired moratoria. c94% have already expired. Stage 2 loans remain relatively high at 8.7% vs. 6.8% pre-Covid-19 – currently reflects uncertainty rather than true default experience. Barring any drastic change to the macro picture, asset quality trends are more likely than not to remain benign.
