Most large European banks experience asset quality deterioration in Q2 2024

Most of Europe's largest banks experienced a decline in asset quality during the second quarter, according to S&P Global Market Intelligence data.

Of 39 European banks with assets exceeding €100 billion, 25 posted year-over-year increases in their nonperforming loan (NPL) ratios as of June 30. Hungary's OTP Bank Nyrt. recorded the highest NPL ratio and the largest increase, rising 85 basis points to 4.66%.

The deterioration in asset quality, especially among Western European banks, is likely part of a global normalization of credit costs rather than a sign of broader issues, S&P Global Ratings said in a July 11 report. But banks with significant exposure to geopolitical risks continue to be affected by Russia's ongoing war against Ukraine, the report added.

A key factor in OTP Bank's weak risk profile is its sustained exposure to Russia and Ukraine, leading to high coverage rates for its subsidiaries in those countries, according to a July 31 analysis by Ratings.

Raiffeisen Bank International AG (RBI), the European bank most exposed to Russia, logged the second-largest NPL ratio increase, up 65 bps to 3.51%. Finland's OP Financial Group saw its NPL ratio rise 50 bps to 3.52%.

Stage 2 loans, or loans with significantly increased credit risk since origination, made up 16.88% of RBI's total gross loans at the end of June. OP Financial posted a stage 2 ratio of 15.58%, while OTP Bank's ratio was 12.66%.

OP Financial's rising NPL ratio is primarily due to its exposure to the weak Finnish real estate sector, Moody's wrote in a June 5 bulletin.

RBI, based in Austria, has been accelerating its exit from Russia amid mounting regulatory pressures. Most recently, its Russian unit restrict outgoing cross-border transfers in foreign currencies from Sept. 2.

Unlike OP Financial, other major Nordic banks have seen only modest increases in bad loans, despite having greater exposure to real estate compared to most European peers.

Sweden's Skandinaviska Enskilda Banken AB (publ) and Svenska Handelsbanken AB (publ) booked the lowest NPL ratios among the sampled banks, at 0.38% and 0.37%, respectively.

While economic uncertainties, declining property prices and rising office vacancies pose challenges for Nordic lenders, large banks in the region are generally well placed to cope with additional stress, Morningstar DBRS said in a June 25 note. The overall impact on asset quality remains limited, given their already low NPL ratios, the agency noted.

Quarter over quarter, Italy's Intesa Sanpaolo SpA saw the largest increase in its NPL ratio, rising 49 bps to 2.01%. The bank has cut exposure to Russia by 86% since June 2022, bringing it down to just 0.1% of total customer loans as of June. CEO Carlo Messina said the bank is working to completely exit Russia, but the sale of its domestic unit is being delayed by bureaucratic hurdles, Reuters reported in February.

In contrast, Italian lender Banca Monte dei Paschi di Siena SpA, along with Spain's Banco Santander SA, Banco de Sabadell SA, Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA, posted the most significant improvements in asset quality.