European underperforming loans rise to their highest ever recorded level

JLL has released its 2022 European Banking: Credit Portfolio Update report which reveals that whilst the average European NPL ratio fell to 1.8 percent at the end of Q2 2022, Stage 2 underperforming loans increased to 9.5% - up from 8.9% at the end of 2021 and the highest level recorded since IFRS 9 Financial Instruments became effective in January 2018. 

Europe is experiencing multiple strong headwinds, and these are more acute in comparison to other regions. Commenting that there is already considerable divergence in both inflation and interest rates across the region, the report highlights that this is something many European economies are not used to seeing. Tightening debt costs are being felt universally and whilst the ECB was initially slow to react, it is now moving more quickly, with financial markets predicting further tightening.

A key challenge facing many real estate corporates, who historically have been reliant on the bond markets, is the quantum of near-term maturities – including the Nordics where JLL estimates circa 32% of real estate corporate bonds are due to mature within the next 2 years, and at a time when debt capital markets are closed, funding costs are rising and asset values falling which might force some of the real estate players to consider more expensive debt, recaps, asset sales or, perhaps more palatable, consider joint ventures with private capital investors. 

“Despite current economic headwind and geopolitical context, Romania’s NPL ratio decreased, in Oct 2022, to 2.9 % reflecting the resilience of the Romanian economy. However, in the context of a high inflation and tightening of monetary policy connected with a forecasted slowdown of the GDP growth, it is likely that these factors will affect household’s spending power as well as companies’ profitability which could ultimately lead to a potential increase of NPLs in the coming months. That said and considering both the level capitalization of the Romanian banking system as well as quality of its loan portfolio, the forthcoming NPL ratio is expected to follow trend witnessed in OECD countries which should allow a normal lending activity across all segments.” says Maxime Otto, Capital Markets at JLL Romania.