Banks in Cyprus, Greece and Portugal may need further reserve build-up, as coverage is not much above the 44.5 per cent EU average despite riskier market characteristics, Fitch ratings agency said in a report.
According to the report, asset quality at EU banks is likely to continue improving in 2018 and 2019, helped by economic growth, but non-performing loans (NPLs) are still much higher in southern Europe than most of northern Europe and banks that do not reduce legacy stocks substantially while economic tailwinds prevail may come under pressure when the economic cycle turns.
“Lower coverage levels for banks in northern Europe should suffice, given the strong collateral, with easier foreclosure and more liquid real estate markets, but further reserve build-up may be needed in Cyprus, Greece and Portugal, where coverage is not much above the EU average (44.5 per cent), despite riskier market characteristics”, Fitch said in its report EU Bank Asset Quality Improves; North/South Split Remains.
The report also notes that average NPL/total loan ratios at the EU’s largest banks had declined to 4 per cent by the end of 2017 from 6.5 per cent at the end of 2014, according to the European Banking Authority (EBA), but varied dramatically by country, ranging from 0.7 per cent in Luxembourg to 44.9 per cent in Greece.
“A north-south divide persists and we expect the gap to continue for some time.”
The country with the largest NPL stock is Italy, accounting for 23 per cent of the €813.1 billion on the EBA’s end-2017 Risk Dashboard, which covers 190 banks.