JLL reports ‘unwanted’ record reached in European banks’ underperforming loans

The consultant highlighted that the proportion of stage two underperforming loans had increased to 9.5% by the end of Q2.

Secondaries investing LPs

In a report issued last week, property consultant JLL warned that despite a continued reduction in European banks’ non-performing loans, including those relating to commercial real estate, the proportion of underperforming loans on bank balance sheets has increased.

In its European Banking: Credit Portfolio Update report, JLL highlighted that although figures from the European Banking Authority show a continued improvement in the EU banking sector in terms of asset quality, stage two or underperforming loans, increased to record levels by the mid-point of this year.

The consultant pointed to the EBA Q2 2022 Risk Dashboard data for the EU banking sector, which showed the average NPL ratio fell by 20 basis points to 1.8 percent over the six-month period to 30 June 2022. JLL added the CRE sector contributed significantly to the reduction, with the CRE NPL ratio down from 4.9 percent to 4.2 percent over the period.

However, it highlighted that, across the EU banking sector, stage two underperforming loans increased to 9.5 percent – up from 8.9 percent at the end of 2021. This represents an “unwanted” record, the consultancy said – the highest level logged since IFRS 9 Financial Instruments became effective in January 2018.

Expired moratoria

JLL highlighted that loans subject to expired moratoria have a higher relative proportion of stage two loans and NPLs. At the end of the second quarter, the volume of loans with expired moratoria was €615.9 billion. France, Spain and Italy continued to top the list recording €174 billion, €140 billion and €130 billion respectively – more than 70 percent of such loan volumes.

Furthermore, the broker added, while France has witnessed a significant reduction from its March 2021 peak of €229 billion, Italy has seen volumes increase by €6 billion year-on-year, and Spain’s total has fallen only modestly.

Loans subject to expired moratoria are 23.6 percent weighted towards stage two loans and 6.2 towards NPLs,  significantly higher than the weighting across the overall loan pile.

“Against the backdrop of significant economic headwinds, the future performance of loans with expired moratoria may be at risk so this could present opportunities for investors,” the consultant wrote.  

Cost of risk

JLL said European banks continued to be relatively optimistic about expected credit losses, with the overall cost of risk – defined as the ratio of provisions to the average volume of loan exposures over a given period – reaching an all-time low of 45bps.

Overall, JLL said banks’ capital ratios remain robust. “Despite the economic pressures evident across Europe, broadly speaking, the banking sector does not look overly stressed at this point.”

However, it added future funding conditions are more challenging. “Investors are finding deal underwriting difficult in an environment of macro-economic uncertainty and rising debt costs, and remain wary of committing capital, which is leading to a significant slowdown in investment activity,” it said.