Italy's largest banks noted improved asset quality in the first quarter, but their problem loans ratios remain elevated compared to other European banks, according to data from S&P Global Market Intelligence.

Problem loan struggles

UniCredit SpA's problem loans ratio for the first quarter was 3.66%, the fifth-highest among the biggest European banks with assets of more than €100 billion. The ratio improved on a yearly basis, declining by 118 basis points, but rose by 60 basis points on a quarterly basis.

The bank, Italy's second-largest by assets, suffered a 70% year-over-year decline in first-quarter net profit to €247 million, as it booked €1.28 billion in loan loss provisions to offset potential losses on its exposures to Russia.

The asset quality of Banco BPM SpA and BPER Banca SpA also improved year on year, with their problem loans ratios declining by 173 and 103 basis points, respectively, to 4.60% and 4.18% in the first quarter. This ranks then second- and fourth-highest among the banks in the sample.

Banco BPM's ratio also improved slightly on a quarterly basis. In May, the bank said it will sell a portfolio of unlikely-to-pay and bad loans, dubbed Project Argo, with an overall gross book value of roughly €700 million. The sale will reduce Banco BPM's gross nonperforming exposures, or NPEs, to €5.6 billion.

Banca Monte dei Paschi di Siena SpA, meanwhile, recorded the highest problem loans ratio at 4.93%. The troubled Italian lender, which has long been weighed down by bad loans, aims to cut its NPEs by €1.3 billion to €2.8 billion in 2026 as part of a new restructuring plan which will also entail a €2.5-billion capital increase.

Efforts by Italian banks to derisk legacy nonperforming loans, or NPLs, have seen them divest around €100 billion of bad debt since the government's Garanzia Cartolarizzazione Sofferenze, or GACS scheme, was launched in 2016, according to research by Scope Ratings. Also, pandemic-related support measures were able to shield new NPLs, but stage 2 ratios are also increasing in Italy.

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Across Europe, meanwhile, Nordic banks Svenska Handelsbanken AB (publ), Skandinaviska Enskilda Banken AB (publ), Swedbank AB (publ) and Nordea Bank Abp had the lowest problem loans ratios, which declined on a yearly and quarterly basis.

Switzerland's UBS Group AG is also among the five banks with the lowest problem loans ratio on the continent, at 0.54%. Credit Suisse Group AG, which is facing damage from the collapse of Archegos Capital and Greensill Capital (UK) Ltd., was not far behind at 0.63%, having increased on a quarterly and yearly basis.

The NPL stocks in Europe's biggest banks dropped by 60% since 2015 to €373 billion, Scope Ratings noted. However, the downtrend in European NPLs will be reversed gradually due to tightening financial conditions in the region, which comes amid increasing interest rates and inflation, as well as the war between Russia and Ukraine. Scope Ratings said delays in the NPL trend reversal offer more time for proactive measures.

Quarterly change

British banks Lloyds Banking Group PLC and NatWest Group PLC both saw their ratios increase by 34 basis points quarter over quarter, while French lender Société Générale SA's ratio rose by 25 basis points.

Among all European banks, KBC Group NV's problem loan ratio had the biggest quarterly decrease of 67 basis points, down to 2.32%. The Belgian lender's unit KBC Bank Ireland PLC, closed the sale of its remaining non-performing mortgage loan portfolio of about €1.1 billion in February, Dow Jones News reported, citing a statement from the bank. The deal brought 2 basis points to the group's common equity Tier 1 ratio, while risk-weighted assets decreased by €800 million for the third quarter of 2021.

Europe's big five

Some of the biggest banks in the bloc by assets saw their problem loans decrease year over year. Those of BNP Paribas SA declined to €27.82 billion in 2021 from the year-ago €30.07 billion. Crédit Agricole Group's problem loans fell to €21.64 billion, from €23.33 billion, in the same period. Barclays PLC has the lowest level of problem loans among the five, declining to €8.61 billion compared to the year-ago €10.04 billion.

Among the five, only HSBC Holdings PLC and Banco Santander SA saw increases in their problem loans. HSBC's climbed to €16.53 billion in 2021 from €15.61 billion in the previous year, while those of Santander rose to €33.23 billion in the same period from €31.77 billion a year ago.