EU: ECB ‘bell’ for pandemic red loans

Although the first data of the banks are encouraging, as they show a reduction of non-performing loans, the European Central Bank remains cautious in estimating that the “final account” of the pandemic may prove to be more “stingy”.

This is because according to the SSM, the supervisory arm of the ECB, Central Bank services are identifying alarming findings that are likely to lead to a new wave of bankruptcies and red loans.

The ECB has found, in particular, that the Non-performing Loans (NPL) ratio increases for those loans that end the grace period (moratorium) or for the loan categories that end the state guarantee period. According to SSM, these loans, in combination with those that have already been regulated, in order not to “blush”, constitute the “Achilles heel” of the banks.

The SSM estimates that even if the pandemic crisis did not lead to an immediate increase in NPLs in the banking sector, the full impact of the pandemic on banks’ balance sheets has not been fully captured. Despite declining NPLs and low levels of insolvency in 2020 and 2021, special attention must be paid to asset quality as government support measures are phased out. At the same time, some economic sectors that were particularly vulnerable to the pandemic are still being affected, while others are being affected by secondary effects, such as supply chain disruptions. At present, banks generally do not seem to expect a significant deterioration in asset quality. In many cases, the capital and profitability of the borrowed companies have been affected during the pandemic and are kept alive only thanks to the liquidity they have received through the support measures. Thus, with these data, the bankruptcy of these companies is not avoided, it is simply suspended for a short time.

Overall, the SSM emphasizes that as the final effects of the pandemic on the quality of banks’ assets remain unclear, credit institutions have not yet come to the fore, as the rapid recovery in profitability may prove to be extremely short-lived. The rapid recovery in bank profits is due in part to volatile sources, such as transaction revenue, which could quickly fall to lower levels.

Regarding the Greek market, according to the data of the Bank of Greece, at the end of June 2021 the amount of NPLs on the balance sheets of credit institutions (on an individual basis) fell to 29.4 billion euros and the NPL index to 20.3 %.

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