S&P webinar: Asset quality holds strong but European banks not out of the woods

➤ Headwinds remain, but lenders' ability to weather the asset quality storm bodes well.

➤ Lessons learned from previous financial crises set lenders up to navigate the recent difficult environment.

➤ Difficulties in the commercial real estate and SME sectors and higher-for-longer interest rates pose particular headaches.

Asset quality at European banks has held up well amid a challenging economic climate, even if uncertainty means it is too early for lenders to declare victory, experts said during a June 13 S&P Global Market Intelligence and European Banking Federation webinar.

"What we're seeing right now is that, yes, asset quality has seen minor deterioration but it's nothing like we expected. It's too early to call victory, per se, because we're still not out of the woods. It's cautious optimism, in our view," said Pedram Moezzi, an economist at Market Intelligence's Banking Risk Service, during the Payback Time: Assessing credit risk at Europe's banks in uncertain times webinar.

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Most central banks in early 2022 started hiking interest rates to try to bring increasing inflation under control. While this gave many lenders a boost in the form of more net interest income, there were fears that the quality of their loan books would diminish as clients faced increased difficulty in paying back loans, particularly amid inflation-driven cost of living spikes. Adding to this was pressure on commercial real estate, made particularly acute by changing work-from-home patterns amid the COVID-19 pandemic.

Lenders weathered much of the predicted storm, said Moezzi, even if some headwinds lay ahead.

The problem loan ratio at Europe's largest banks ranged from OTP Bank Nyrt.'s 4.68% to the 0.30% recorded at Skandinaviska Enskilda Banken AB (publ) (SEB) as of the end of the first quarter of 2024, Market Intelligence data shows. Stage 2 loans ranged from 18.88% at Raiffeisen Bank International AG to 3.30% at Standard Chartered PLC.

"There's still a little bit of uncertainty, especially if you look around the euro area, about the trajectory of core inflation, for instance, and also wage growth dynamics. That's still in the back of our mind," Moezzi said, adding that some sectors, including commercial real estate and small and medium-sized enterprises, were showing signs of worsening asset quality.

Reasons for resilience

Among the reasons for this resilience was that banks and their clients had learned from previous tough economic climates, said Charlotte Norrby, group credit officer at SEB. The Swedish lender had, among other things, tightened up its underwriting standards to focus more on cash flow, while clients themselves had put fallbacks in place, Norrby said.

"What I think we have underestimated is actually the buffers and the savings that households have built up during the low interest rate times," said Norrby, noting that this was particularly the case in Nordic markets, where households "save a lot in equities and mutual funds and things like that."

Apart from watching asset quality, it was equally important lenders kept a keen eye on a "lack of demand for borrowing" in a situation where interest rates remain higher for longer.

For Greek banks, resilience during the current tough times was built on lessons learned from a near two-decade period of economic turmoil in the country, said Ioannis Stamoulis, chief risk officer at Piraeus Bank.

"The Greek banking sector has been through major transformation, with a balance sheet clean-up [and] building solid profitability at the capital base. After 12 years, shareholders will be receiving dividends, elevating further investment confidence, along with the country's stable political and financial environment," he said.

In an example of the improvements to the banking sector, Piraeus recently upgraded its 2024 guidance and now expects a full-year 2024 net profit of some €1 billion.

Greek banks has also been sheltered from many of the real estate difficulties because property prices took a substantial knock during the period of financial crisis — with there still being room for prices to reach their late-2000s levels, said Stamoulis.

"The real estate market in Greece is a different landscape to the rest of Europe and the US, and we do not expect downward pressure in this [CRE] sector," said Stamoulis.

– Take a deeper look at commercial real estate in the "CRE Zone" on S&P Capital IQ Pro. – Delve into more data dispatches from the EMEA region. – Access a peer analysis template on S&P Capital IQ Pro.