S&P Webinar: Europe’s banks weather asset quality storm, but “still not out of the woods”

➤ European banks’ ability to weather the asset quality storm bodes well.

➤ Lenders look well able to navigate the recent difficult environment.

There has been a minor deterioration in asset quality at European banks, but it has not been as bad as many feared.

This was the key takeaway from the recent Payback Time: Assessing credit risk at Europe's banks in uncertain times webinar, hosted by S&P Global Market Intelligence and the European Banking Federation.

While headwinds remain – particularly in the commercial real estate and SME sectors, especially amid a higher-for-longer interest rate cycle – lenders look well able to handle the challenging environment, the panel agreed.

“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," Pedram Moezzi, an economist at Market Intelligence's Banking Risk Service, said.

As central banks started hiking interest rates in early 2022 to try bring increasing inflation under control, there were fears that the quality of banks’ loan books would deteriorate. Pressure on commercial real estate, made acute by changing work-from-home patterns amid the COVID-19 pandemic, added to those fears.

But lenders weathered much of that storm, said Moezzi.

Market Intelligence previously reported that 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. Stage 2 loans ranged from 18.88% at Raiffeisen Bank International AG to 3.30% at Standard Chartered PLC. Central and eastern European banks held the highest at risk loans, the data showed.

Among the reasons for this resilience was that banks and their clients learned from previous tough economic climates and planned ahead, said Charlotte Norrby, group credit officer at SEB.

"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.

For Greek banks, resilience 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 banking sector “has been through major transformation,” he said, including undergoing clean-ups to their balance sheets and building up solid profitability.

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