Non-performing loans: Tense situation in Europe made worse by Italy

As revealed in the latest figures of the European Banking Authority (EBA), the share of non-performing loans (NPLs) in the total liabilities of banks in the European Union declined in the fourth quarter 2016 by 0.3 percentage points to 5.1 percent. While a drop can be noted in virtually all countries, the overall situation is only improving very slowly and extreme differences continue to exist between the countries. For example, NPLs in the UK, the Netherlands, Germany, Denmark and Belgium cause few problems, with the NPL ratio at an extremely low level in these countries of between less than two and a good three percent. This contrasts with the banks in Greece and Cyprus which, with an NPL ratio of 46 and 45 percent respectively, are at risk suffocating beneath the burden of NPLs. Ailing banking sectors can also be found in Portugal, Ireland and in particular in the economic heavyweight Italy.

No progress has been achieved in Italy for some time. But recently an improvement in the NPL ratio by 0.9 percentage points to 15.3 percent was registered in the final quarter of 2016. Despite this, the situation in Italy remains exceptionally tense. There are numerous reasons for the high share of NPLs. The adverse economic development clearly plays a key role here, as do the various crises of past years. This has caused the number of defaulting loans to surge upwards. But even before the crisis in the sector, the credit quality of Italian banks was frequently poorer – owing to a less-rigorous loan granting policy – than that of their counterparts north of the Alps. The latest improvement in the NPL ratio is thanks to the restructuring efforts that have been initiated. It can also be attributed to the economic recovery, gradual signs of which could already be noted in 2014 and which continued to slowly gather pace the last year and in the year before.

Further relief should be derived from the newly-established „bank bailout funds“. However, progress in restructuring the balance sheets of the Italian banking sector is turning out to be far more sluggish than anticipated. Finding players willing to provide financial support for the bailout funds is proving difficult. Yet there are also advantages to be gained from the urgently necessary struggle for the rehabilitation of Italian credit institutions: It highlights the dangerous situation to which the banks concerned are exposed and compels them to limit risks. The harder the banks find it to rid themselves of NPLs, the more responsible they become in their policy of granting new loans following a successful restructuring, and the more the credit quality moves into the focus of the regulators.

Although Italy and the Eurozone are expected to remain on an economic expansion course this year and next, it will take longer to sort out the NPLs. The crucial point for banks is not just to reshape their balance sheets but, more importantly, to also consistently apply a sustainable loan granting policy in the future.


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