Banks across the European Union (EU) reported a notable increase in souring loans to small and medium-sized enterprises (SMEs) in the year’s first quarter. Despite this, the sector’s profitability has remained resilient, according to the European Banking Authority (EBA).
In its latest quarterly “risk dashboard,” the EBA revealed that non-performing loans have risen by 2%, equivalent to €7 billion, as credit risks begin to materialise. This uptick has raised concerns about the asset quality of loans, particularly those extended to commercial real estate, SMEs, and consumer credit, with further deterioration expected in the next six to twelve months.
The rise in interest rates over the past two years, aimed at curbing inflation, has made borrowing more expensive, exacerbating the financial strain on SMEs. Earlier this month, the European Central Bank initiated rate cuts, indicating that the peak of borrowing costs in the eurozone has likely passed.
Despite these challenges, EU banks have maintained resilient profitability. However, the EBA anticipates a slowdown in profits over the next six to twelve months due to the recent interest rate cuts, although loan growth is expected to continue.
The EBA also noted an increase in the cost of risk, an indicator of loan losses, which has reached levels not seen since the COVID-19 pandemic in 2020. This development has prompted regulators to scrutinise the connections between banks and non-banks, such as investment funds and insurers, due to concerns about financial stability.
John Berrigan, Director General for Financial Services at the European Commission, highlighted these concerns at a recent Politico event, emphasising the potential risks associated with banks channelling risks through non-banks. The EU Commission is currently considering whether new regulations are needed to address these issues.
Most banks argue that their direct links with non-banks pose limited risks, a point echoed by the EBA. Nonetheless, the situation remains under close watch as regulators seek to ensure financial stability across the sector.
