Cyprus has recorded the most significant progress among European Union countries in reducing non-performing loans, according to a new report by Scope Ratings.

The non-performing loan (NPL) ratio in Cyprus stood at 1.9 per cent at the end of 2024, marking a decrease of 0.3 percentage points compared to the previous quarter and a decline of 0.5 percentage points over the past twelve months.

This improvement is the largest among the EU countries assessed by Scope Ratings, and subsequently reported by local outlet Stockwatch.

The progress reflects ongoing efforts to stabilise the banking sector, as the NPL ratio in Cyprus had exceeded 19 per cent in 2019.

The reduction is largely attributed to the targeted strategies of the country’s two largest banks.

The Bank of Cyprus managed to lower its non-performing loan ratio from 3.6 per cent in 2023 to 1.9 per cent in 2024, while Hellenic Bank reduced its ratio from 2.5 per cent to 2.4 per cent.

Meanwhile, Greece also saw a decline in its NPL ratio to 2.9 per cent.

Across the European Union, the overall NPL ratio remained unchanged at 1.9 per cent in the fourth quarter of 2024, suggesting a temporary stabilisation.

However, Scope Ratings warned that this stability may be short-lived in 2025 due to increasing pressures, particularly in corporate banking portfolios.

The rising risk is driven primarily by a sharp deterioration in corporate loan quality in markets such as Austria and Germany.

In Austria, the NPL ratio increased to 2.4 per cent, surpassing Italy for the first time, while in Germany, it rose to 1.58 per cent.

These increases stem from a worsening corporate loan environment, with Austria and Germany seeing respective increases of 53 and 9 basis points in just one quarter.

Elsewhere, other EU countries are on a different trajectory, showing continued improvement in their non-performing loan ratios.

Italy continued to improve its NPL ratio, reaching 2.31 per cent, while Spain recorded a reduction to 2.68 per cent. Portugal, Ireland, and Greece also followed this downward trend.

The divergence between central and peripheral EU nations highlights the varying stages of the credit cycle experienced by different markets and underscores the importance of proactive risk management.

The agency also explained that deterioration in corporate loan quality is particularly pronounced in the real estate, construction, and manufacturing sectors.

The NPL ratio in real estate increased to 2.8 per cent, with notable deterioration in Austria, Germany, and France.

The construction sector maintained a high NPL ratio of 6.3 per cent, peaking at 7.1 per cent in Austria, while non-performing loans in the manufacturing sector rose to 4 per cent.

These three sectors account for 40 per cent of corporate lending across the EU, making them critical to overall credit quality trends.

Scope also mentioned that the state of household loans across the EU remains generally stable.

Italy, Spain, and Austria continued to see declines in non-performing household loans.

However, the Netherlands experienced a slight increase to 1.2 per cent, though this remains well below the EU average.

The agency also raised concerns over Stage 2 loans, which exhibit signs of deterioration but are not yet classified as non-performing.

The EU-wide Stage 2 loan ratio increased to 9.7 per cent, with the Netherlands recording the largest rise to 10.1 per cent.

The increase in these loans signals potential asset quality deterioration and foreshadows a possible rise in non-performing loans in 2025, especially if economic uncertainty persists.

In terms of 2025 as a whole, Scope Ratings concluded that the current year will present heightened challenges for European banks.

While most indicators remain stable for now, the underlying increase in credit risk across key sectors, combined with geopolitical tensions and a potential economic slowdown, could trigger new waves of pressure on bank balance sheets.

*This article is a translated version of content originally published on StockWatch.