Bank loan default rate set to rise in eurozone as loan growth slows since peak of pandemic

Loan losses are expected to rise from 2.2% in 2021 to a peak of 3.9% in 2023, ahead of 2019’s 3.2%, but still modest by historical standards – losses averaged 6% between 2012 and 2019

Total eurozone bank lending is expected to grow by 3.7% in 2022 and just 2.9% in 2023 – a slowdown from the pandemic peak of 4.3% in 2020, but still above the growth rate average of 2.8% before the pandemic (2018-2019)

Business loan growth is expected to fall in 2023 to 2.3%, but will remain stronger than the pre-pandemic average growth of 1.7% (2018-19)

Mortgages are expected to maintain a steady average growth of 4% over the next three years, above the 2019 level of 3.2%

Consumer credit is expected to rebound from -2.7% decline in 2020, to 2.6% growth in 2022 – although this remains weak compared to 5.6% growth in 2019

LONDON, WEDNESDAY 4E MAY 2022: The number of businesses and households in the eurozone unable to repay their bank loans is set to increase, according to the first EY’s European Bank Lending Economic Forecast. Loan losses are expected to reach a five-year high of 3.9% in 2023, although they will remain below the previous peak of 8.4% seen in 2013 during the eurozone debt crisis.

The rise in defaults comes amid slowing loan growth, which is expected to slow to 2.9% in 2023, as post-pandemic loan demand is suppressed by rising inflation and lending. financial impact of the war in Ukraine.

Overall bank lending growth, however, is expected to rebound, averaging 3.4% over the next three years before reaching 4.0% in 2025 – a level last seen in 2020, when the programs of government-backed pandemic loans drove the numbers up.

Omar Ali, Head of Financial Services for the EMEIA region at EY, comments: “The European banking sector continues to show resilience in the face of significant and persistent challenges. Despite eight years of negative interest rates in the Eurozone and an expected increase in loan losses, banks in major European financial markets remain in a strong capital position and are supporting their customers in these uncertain times.

“Although the next two years will see more moderate loan growth rates than those seen during the peak of the pandemic, the economic outlook for the European banking sector is one of cautious optimism. Optimistic because the worst of the economic effects of the COVID-19 pandemic seem to be behind us and the recovery is progressing well. Cautious, as significant emerging headwinds loom in the form of geopolitical unrest and price pressures. This is another pivotal moment in time where financial institutions and policymakers must continue to support each other to meet the challenges ahead, compete globally and increase economic prosperity.

Loan losses expected to rise, but from historically low levels

Non-performing loans in the euro area as a share of gross corporate loans fell to a 14-year low of 2.2% in 2021 (from 3.2% in 2019), largely due to the persistence negative interest rates and government interventions introduced to support households and households. business income during the pandemic.

the European bank EY lending forecast forecasts that loan losses in the euro area will increase, increasing by 3.4% in 2022 and a further 3.9% in 2023, compared to an average of 2.4% over 2020 and 2021. However, defaults are expected to remain modest by historical standards: losses averaged 6% from 2012 to 2019 and reached 8.4% in 2013 in the aftermath of the Eurozone debt crisis. Immediately before the pandemic, loan losses averaged 3.5% in 2018-19.

Across the euro area, pockets of business fragility remain particularly high in certain sectors, including leisure and tourism, which have been hit hardest by pandemic-related lockdown restrictions. While business insolvencies remain subdued overall, temporary suspensions of the requirement to file for insolvency mean that there is a backlog of unresolved cases, the number of which could increase over time.

Corporate appetite to borrow is weakened by geopolitical uncertainty and ample liquidity

the EY European Bank Loans Economic forecasts forecasts net lending to eurozone businesses to grow by 3.6% in 2022, before slowing to 2.3% in 2023. This compares to a 12-year high of 5.3% recorded during the first year of the pandemic – strongly boosted by government financial support – and much lower growth rates before the pandemic, which averaged 1.7% in 2018 and 2019.

In the short term, corporate loan growth is expected to weaken from the peak of the pandemic, following the withdrawal of government and ECB support, pressure on investment appetite due to economic uncertainty resulting from the war in Ukraine and the increased focus on improving corporate balance sheets. The 300 billion euros of “excess” liquidity that eurozone companies have accumulated during COVID-19 should also weigh on the demand for loans.

Another drag on loan growth could come from the end of the ECB’s targeted longer-term refinancing operations program, which allowed banks to borrow at lower rates.

Nigel Moden, EMEIA Banking and Capital Markets Leader at EY, comments:Bank credit traditionally covers around half of the financing needs of companies in the euro zone. While business lending increased in the first half of 2020, as companies took advantage of government-backed loan programs, borrowing growth fell through much of 2021. This trend is expected to continue through 2022, as high inflation bites and sentiment is hurt by the war in Ukraine, which has led to large commodity price hikes and other sources of supply chain disruption.

“In such a turbulent economic environment, it is remarkable how resilient European banks continue to be, as they remain focused on supporting their customers. Pandemic years continue to present a real-time stress test for the industry, but lending numbers – albeit depressed in the very short term – demonstrate that the sector can expect a rebound to pre-pandemic levels in the not-too-distant future.”

Mortgage growth to decline from record 2021 pace, but still strong

Mortgages in the euro area are expected to grow by an average of 3.9% between 2022 and 2024, compared to 4.5% in 2020 and 5.2% in 2021.

Mortgages have had a surprisingly strong performance during the pandemic. In 2020, mortgages in the region recorded their highest rate since 2007, thanks to extremely low interest rates, rising property prices, the pandemic-related shift to working from home and the ability of some buyers to tap into unexpected savings to help fund deposits. .

However, the outlook is less favorable as property prices continue to rise, interest rates are expected to rise and regulatory measures are introduced in some Eurozone economies to cool inflamed property markets.

Nigel Moden comments: “Affordability is increasingly key as mortgage holders have been warned by the ECB that we are months away from an interest rate hike. For customers who have fixed rate mortgages, while there is no immediate impact of a rate increase, they should closely monitor factors such as inflation and economic strength. here the end of their fixed rate period. On the banks’ side, rising rates will likely lead to a slowdown in first-time mortgage lending and refinancing activity, which they will prepare for.

Cost of living pressures have mixed implications for consumer credit

The stock of consumer credit in the euro area fell by 0.4% in 2021, after having already fallen the previous year by 2.7%. This compares to pre-pandemic growth of 5.6% in 2019.

the EY’s European Bank Lending Economic Forecast forecasts that consumer credit will grow by 2.6% this year and another 1.7% in 2023. However, a significant number of households will be able to draw on the savings accumulated during the pandemic, which further dampens demand for unsecured debts.

Nigel Moden comments: “The stronger pressure on household purchasing power due to high inflation will have a mixed impact on the outlook for unsecured lending – weakening it by reducing discretionary consumer spending, but also supporting the demand by forcing some households to resort to credit to maintain consumption As they have done throughout the pandemic years, banks will need to review and strengthen supports for vulnerable customers, many of whom will already be considering unsecured credit options to help pay rising energy and food bills.

Omar Ali concludes: “Once again, households, companies and banks in the euro zone are put to the test. The current combination of rising interest rates, soaring energy and commodity prices, and significant geopolitical uncertainty is placing enormous pressure on households and businesses, many of which have just recovered from the pandemic. . While these factors are expected to continue to weigh on businesses and consumers in the near term and dampen appetite for bank lending, banks remain well capitalized and ready to support their customers and the economy during this period of continued volatility.

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