Soured credit at euro zone banks falls to new low despite recession: ECB

Bad loans at euro zone banks fell to a new low in the last quarter of 2020, fresh data showed on Monday, underscoring warnings from the European Central Bank that lenders are not preparing for a deluge of soured credit after the pandemic.

The ratio of non-performing loans at banks supervised by the ECB fell to 2.63%, the lowest level since the start of supervision in 2015, despite a deep and scarring recession that will likely weigh on the economy for years to come.

Banks have managed to improve their loan books thanks to abundant government guarantee and credit schemes that are keeping the corporate sector afloat, even as large swathes of the services has been kept mothballed for the past year due to lockdown measures.

But reality is bound to catch up with banks, the ECB has warned, arguing that some lenders are unprepared and have insufficient warning systems in place.

Still, banks have ample capacity to absorb a rise in soured credit as their combined common equity tier 1 (CET1) ratio rose to 15.62%, also the highest since the start of supervision.

In a potential preview of the likely credit quality deterioration, impairments and provisions nearly doubled last year, the ECB said, while profitability collapsed with return on equity falling to 1.53% in the fourth quarter, far below the cost of capital and just a fraction of the 5.16% recorded a year earlier.