EU watchdog flags jump in problem loans to small companies

London — Banks across the EU experienced a jump in souring loans to small and medium-sized enterprises (SMEs) in the first quarter of the year, though their profitability held up, the bloc’s banking watchdog said on Thursday.

The European Banking Authority (EBA) said in its quarterly “risk dashboard” that credit risks have started to materialise with an increase in nonperforming loans (NPLs) in the three months to March.

“Profitability of EU banks remains resilient although the sector is confronted with materialising credit risks,” EBA said in a statement.

“The majority of banks surveyed expect further asset quality deterioration in CRE (commercial real estate), SME loans and consumer credit in the next 6-12 months,” EBA said.

Interest rates in the eurozone have risen sharply to quell inflation, making loans more expensive, though the European Central Bank began cutting rates this month, signalling that the bloc’s peak in borrowing costs has passed.

EU banks expect a slowdown in profits in the next 6-12 months amid interest rate cuts, though loans are expected to grow, EBA said.

Banks reported that NPLs rose by 2%, quarter on quarter, equivalent to €7bn. 

Banks’ cost of risk, which is an indicator of loan losses, also rose to a level not seen since the Covid-19 pandemic in 2020, EBA said.

Regulators have begun scrutinising links between banks and “nonbanks” such as investment funds and insurers, an area where data for assessing systemic risk is patchy.

The EU’s executive European Commission is considering whether new rules are needed.

John Berrigan, who heads the commission’s financial services unit, said on Wednesday there were financial stability concerns about links between banks and funds.

“We don’t want the banks to re-risk through another channel, that is the concern,” Berrigan told a Politico event.

Most banks, however, argue that direct links with nonbanks are of limited risks, EBA said.

Reuters