Banks across the EU have experienced a jump in souring loans to small and medium-sized companies during the first three months of the year, though their profitability held up, the bloc’s banking watchdog has said.
The European Banking Authority (EBA) said in its quarterly “risk dashboard” that credit risks have started to materialise with an increase in non-performing loans.
It said that profitability of EU banks “remains resilient although the sector is confronted with materialising credit risks”.
“The majority of banks surveyed expect further asset quality deterioration in commercial real estate, small and medium-sized enterprises (SMEs) loans and consumer credit in the next six to 12 months.”
Interest rates in the eurozone have risen sharply over the last two years in order to stem inflation, making loans more expensive. Earlier this month, the European Central Bank began cutting rates signalling that the eurozone has now passed the peak in borrowing costs.
EU banks expect a slowdown in profits in the next six to 12 months amid interest rate cuts, though loans are expected to grow, the EBA said.
Banks reported that non-performing loans rose by 2%, quarter on quarter, equivalent to €7bn.
The EBA added that banks’ cost of risk of banks, an indicator of loan losses, also rose to levels not seen since the covid pandemic in 2020.
Regulators have begun scrutinising links between banks and ‘non-banks’ 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.
Director general for financial services at the EU Commission John Berrigan 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 non-banks are of limited risks, the EBA said.
