European banking sector continues painful path to recovery but bad loans still loom

 
Jasper Jolly
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Non-performing loans are still a big drag on the European banking sector (Source: Getty)

Europe’s banks took further steps on the painful recovery path last year, but non-performing loans still loom over the sector, according to European Central Bank (ECB) data published today.

The number of credit institutions in the Eurozone fell from 2,379 in 2015 to 2,290 last year, the ECB said, with almost 7,000 branches closed over the course of the year.

The European banking sector has endured a painful period of consolidation since the financial crisis and the subsequent Eurozone sovereign debt crisis revealed banks were massively overstretched.

The giant stock of non-performing loans (NPLs) which remains from the Eurozone crisis still needs to be addressed, the ECB said. NPLs are debts which have not been serviced for at least 90 days.

Read more: European Central Bank to get tougher on EU lenders' bad loan books

The ECB, which is planning to raise capital requirements for banks with new bad loans, said in its report: “Although the median non-performing loan (NPL) ratio continued to decline in 2016, NPLs remain persistently high in a number of countries and have increased further in some cases.”

Domestic euro area bank assets rose to €24.4 trillion (£21.7 trillion) at the end of 2016, only a 0.5 per cent increase year-on-year and still 14 per cent below the level seen in 2008. However, the annual growth rate of only 0.5 per cent was well below GDP growth: the Eurozone economy grew by 1.76 per cent during 2016, according to the International Monetary Fund.

The slow recovery of bank assets has accompanied a much faster increase in non-bank lending, with shadow banking entities, such as hedge funds and investment funds, collected amongst others under the description “other financial intermediaries” (OFIs) driving much of the increase.

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The ECB’s report said: “The relative importance of non-banks in the euro area financial sector has grown steadily since the onset of the financial crisis, in particular on the back of the significant expansion of the OFI sector, but this trend appears to have paused recently.”

Meanwhile banks have retreated to a more “traditional” business model, the ECB said, with capital holdings increasing and less leverage.

As a proportion of total assets the share of the non-bank financial sector increased from 43 per cent in 2008 to 55 cent in early 2017, the ECB said.

The biggest cross-border exposures for European banks outside of the Eurozone remain with the UK.

Read more: Italian banks face another €10bn of bad loan writedowns

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