ECB: Red loans in the Eurozone increased in 2023

An increase was observed in the Eurozone , according to its Annual Report , for the supervisory activity announced today (21.3.2024). According to the ECB report “The figures for the first nine months of 2023 show a gradual but moderate increase in the volume of non-performing (red) loans (SDRs). Inflationary pressures and market pressures on sensitive portfolios characterised by credit risk, such as consumer credit and residential and business property, as well as small and medium-sized enterprises, continued. Therefore, increased provisions due to higher credit risk may adversely affect future profits’ Despite the fact that the Non-performing Loan Index remained stable overall in the 2023 cycle, the ECB found a deterioration in portfolios showing greater vulnerability to inflationary pressures, including loans to households. It also noted a downturn in professional real estate markets, as well as increased pressure on borrowers’ ability to refinance loans for business properties at their end. In addition, firm defaults and default rates increased from the low levels recorded during the pandemic. Euro area businesses, especially small and medium-sized enterprises, also continued to face difficulties, due to higher funding costs, but also higher costs in general due to inflation. Undertakings with a large loan burden or undertakings operating in vulnerable sectors were more affected by increased costs and reduced demand, which in turn pushed the profit margins. ECB head Christine Lagarde, pre-empting the Report pointed out that banks maintained satisfactory capital adequacy and liquidity indicators, with the total Common Equity Capital Index of Category 1 (CET 1) of supervised banks being formed at 15.6%, close to its historically high level. However, he warned that there are still several challenges. While higher interest rates negatively affected the net interest margins of euro area banks, resulting in an average equity return rate of 10% in the third quarter of 2023, deposit rates increase, and non-performing loans. For its part, the President of the Supervisory Council Claudia Buch argued that European banks have proved to be resistant to the disruptions that have affected our economies in recent years. The COVID-19 pandemic, the increase in energy and inflation prices, Russia’s invasion of Ukraine and, more recently, the conflict in the Middle East, put pressure on the Eurozone economies. ‘The highest interest rates were certainly an important factor in contributing to a strong increase in bank profitability, and for the additional reason that banks were late to adjust deposit rates. Bank capital adequacy indicators remained satisfactory and significantly higher than supervisory requirements. At the same time, their liquidity indicators remained satisfactory, even after the gradual withdrawal of the favourable financing provided by the ECB. Source: RES – ICM