LONDON – European banks are now in better shape than they were when the pandemic started for two reasons, a Goldman Sachs analyst told CNBC on Wednesday.
“The NPL rate is lower year-over-year, so the portion of your book that is not performing has actually decreased year-over-year,” said Jernej Omahen, Head of European Financial Institutions Research at Goldman Sachs.
Bad loans refer to loans that the borrower can no longer pay. These formed a large part of the balance sheets of European banks after the crises of 2008 and 2011 and were one of the elements that prevented profitability.
“Right now, part of the reason for this is structural,” Omahen said, citing the risk-reduction efforts that European lenders have made since the global financial crisis.
The second reason for the improvement in the balance sheets “is just the reality of events, which also means that we have provided substantial fiscal and monetary support to the economy and businesses,” said Omahen.
After the pandemic, European governments proposed various measures to prevent a wider economic collapse. These fiscal stimulus measures prevented a large wave of bankruptcies across the bloc and prevented the balance sheets of European banks from deteriorating.
In addition, there have also been extensive monetary stimuli to contain the economic shock through lockdowns and social distancing measures.
The latest data from the European Central Bank shows that non-performing loans fell from a high of 1 trillion euros ($ 1.22 trillion) in 2016 to around 550 billion euros in mid-2020. This latest level of bad loans accounted for almost 3% of total credit in the European banking system in mid-2020.
However, the ECB’s regulator has raised concerns about the future stability of banks’ balance sheets.
“The economic crisis caused by the coronavirus pandemic is likely to trigger a sharp increase in non-performing loans: in a serious but plausible scenario, they could reach up to 1.4 trillion euros by the end of 2022,” the regulator said on its website.
Speaking to CNBC last month, ECB Vice President Luis de Guindos said the 19 countries that share the euro face increased and uneven financial risks and that more targeted incentives may be needed if the region moves away from the coronavirus Crisis recovered.