FORECAST/RESEARCH/STUDY

NPL Monitor: Bad Loans Continue To Fall In CESEE Despite Macro Challenges

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By Svitlana  Pyrkalo @ebrdsvitlana

Bad debt, also known as non-performing loans (NPLs), has fallen again in the year to the end of June 2023. The year-on-year decline of 0.3 percentage point has brought the average NPL ratio (the share of bad loans to total debt) to 2.2 per cent. The ratio has continued to decline since the EBRD-led NPL Monitor, a biannual publication, was first published in 2016.

The largest decrease in NPL ratios in the year to 30 June 2023 was recorded in Bulgaria, where they dropped 1.5 percentage points to 3.8 per cent of the total debt.

Ukraine was the only country to experience an increase in NPL ratio, up by 9.2 percentage points to reach 38.9 per cent, despite a 2 per cent reduction in total NPL stock to €10.7 billion(US$11.54billion).

The regional decline is also a new record low across the 17 economies of central, eastern and south-eastern Europe (CESEE) since 2016, when the regional average stood at 7.2 per cent of total loans. Another notable decrease in the NPL ratio outside of the CESEE region was Greece, where the figure stood at 33.4 per cent in June 2015 but had fallen to 7.5 per cent by the end of June 2023.

In terms of NPL stocks, the average decline was 6.8 per cent. NPL volumes across the CESEE region stood at €27.9 billion(US$30.12billion) as at 30 June 2023.

Latvia showed the highest relative reduction in NPL stocks (by 26.2 per cent), followed by Croatia (by 23.9 per cent) and Bosnia and Herzegovina (by 17.7 per cent). Poland reduced its NPL stocks by the highest absolute amount (€700 million, or 7.1 per cent of its total stock).

Only three economies saw an increase in NPL volumes: Albania (8.4 per cent), Serbia (5.8 per cent) and Kosovo (1.2 per cent).

The average percentage of NPL provisions divided by the NPL stock (the NPL coverage ratio) showed a slight, continued decline of 0.2 percentage point to 64.3 per cent between June 2022 and June 2023, maintaining its average level since the COVID-19 pandemic.

While some of the decrease in NPL volumes can be attributable to NPL sales from banks to third-party investors, this is expected to account only for a fraction of the reduction, as the level of publicly reported transactions remained subdued during the period. Loan write-offs and progress on restructuring, enforcement and recovery efforts are likely to have played a key role.

The report cautions, however, that macroeconomic challenges remain, including rising interest rates and ongoing inflation. Assets are most likely to be affected by further shocks in the areas of real-estate lending, unsecured consumer lending, assets that have benefited from pandemic-era support, and sectors vulnerable to inflation and commodity prices

The report emphasises that regulators and banking supervisors need to remain vigilant for any signs of deteriorating asset quality or a rise in NPLs within the financial sector. The report concludes that banks need to be fully prepared for potential declines in asset quality, ensuring that they have robust credit-risk monitoring and management, appropriate loan classification, accurate loan staging (in line with IFRS 9) and adequate loan loss provisioning.

Overview of the NPL profile in the CESEE region, 30 June 2022 to 30 June 2023

The half-yearly report tracking NPLs has been prepared by the EBRD as part of the European Bank Coordination “Vienna” Initiative framework. The NPL Monitor is published on the Vienna Initiative website, alongside the partner publications prepared by the European Investment Bank (the Bank Lending Surveys, which are also being issued today).

Starting with this edition of the report, data on Georgia, Kazakhstan and Türkiye have been added to the coverage.

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.

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