Non-performing loan portfolios may have seen a sharp drop off from their peak levels a few years ago but there is still a long way to go before European banks wind down. flow provides an update on this market and looks at new investors who are entering the fray
Financial institutions across the EU are redoubling their efforts to excise large volumes of non-performing loans (NPLs) from their balance sheets. So far, their attempts to wind-down NPL holdings have largely been quite successful. According to European Central Bank (ECB) data, European banks are currently sitting on approximately EUR714.3bn worth of NPLs, although this is still a sharp drop-off from 2016 when that number stood at EUR1.12trn.1 As a result, the NPL ratio across European banks fell to 4.81% (at Q1 2018) down from 5.90% in 2017, denoting a year-on-year decline of 1.09%.2
Given the interconnectedness of the European banking system, regulators including the ECB and European Commission (EC) have been actively pushing for banks to de-risk and remove NPLs entirely from their balance sheets. Most recently, the EC proposed a series of revisions to the Capital Requirements Regulation including one provision stipulating banks have sufficient loss coverage for any future NPL originations3. As banks continue to deleverage, the overall supply of NPLs - especially those that have originated in Southern European markets such as Portugal, Italy, Spain, Greece and Cyprus is likely to remain buoyant.
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