Asset Quality Trends and Risks across European Banks

Since the onset of COVID-19, European banks’ exposure to small and medium enterprises (SMEs) and mortgages increased materially, supported by highly accommodative fiscal and monetary policies. Asset quality remained resilient throughout the pandemic, with the NPL ratio trending down, supported by government measures. On the flip side, at risk/stage 2 loans remain elevated even as support schemes are gradually rolled back. Additionally, housing prices peaked and are likely to see some correction. However, we believe economic turnaround and high employment rates will continue to support asset quality. Furthermore, provisions for loan losses and capitalisation remain high compared with the pre-pandemic levels, which should create a sufficient cushion against potential challenges.