No Match Found
Economic growth in the European Union (EU) is projected to remain subdued in the current year. The Euro area entered a technical recession during the first quarter of 2023.
The economic landscape presents significant challenges, characterized by sluggish economic growth, sticky inflation, and rising interest rates. These factors have affected both consumer and business confidence, leading to a decrease in risk appetite among banks.
Banks' asset quality metrics have not yet been significantly affected by the challenging economic environment. EU non-performing exposures remained stable quarter-on-quarter at €357 billion (2.2% of total loans), representing a reduction of approximately €730 billion compared to 2015.
In Italy, the NPEs in the first quarter of 2023 stood at approximately €58 billion, equating to a 2.9% gross NPE ratio, indicating historically low levels compared to the past. This figure showed almost no change compared to the previous quarter (4Q22), signifying a consistent convergence towards EU standards.
At the aggregated level, default rates remain well-controlled at around 1%, suggesting limited inflows to NPEs. However, the default rate for corporates has begun to increase again after several years.
Looking ahead to 2023, banks expect asset quality to deteriorate further across both consumer and corporate, as per the results of the spring 2023 edition of the EBA's risk assessment questionnaire. The economic outlook may have stabilized in recent months, and unemployment rates remain at or near historical lows in Europe, but sticky inflation and increasing interest rates could still challenge overindebted borrowers.
Looking at the banks' books, there are still signs of caution. IFRS9 stage 2 loans at the EU level stabilized at €1.350 billion, decreasing during Q1 2023 from 9.6% to 9.3% of total loans. This was mainly due to a decrease in stage 2 allocation for corporate loans. France is the country with the highest stock of stage 2 loans, surpassing €450 billion.
Italy exhibits a prospective risk higher than the EU average in stage 2 and loans. In December 2022, Italian banks held approximately €227 billion of stage 2 loans, representing 11.3% of the total compared to the EU average of 9.1%.
In addition, starting from 2020, over 340 billion euros of financing with public guarantee have been provided. These loans have completed the pre-amortization period and may experience a growth in risk profile in the current challenging macroeconomic environment.
Both banks and the Regulator are increasingly paying attention to these loans.
Several major banks have activated dedicated assessments of their stage 2 portfolios and identified preliminary actions to reinforce current management strategies to mitigate the further deterioration of positions and its related economic and capital impacts.
In this context, after the extensive clean-up of bank balance sheets from bad loans, the focus of new flows has shifted towards UTP and pre-deteriorated/ stage 2 assets. These credits require a closer approach to companies. The management approach is no longer focused on maximizing the amount to be recovered, but the priority becomes restoring the positions in clear difficulty.
Banks, investors and servicers need to review their agenda and refocus on new priorities, which requires developing and acquiring new skills and placing technology at the center of their strategy.
Pier Paolo Masenza
Partner | Financial Services Leader, PwC Italy
Partner, PwC Italy