By Svitlana  Pyrkalo @pyrkalo

Initial fears of rapid deterioration in asset quality due to the COVID-19 pandemic have not yet materialised and non-performing loan (NPL) stocks are now back on their pre-pandemic downward trend, according to the latest NPL Monitor published today.

The half-yearly report tracking non-performing loans has been prepared by EBRD as part of the Vienna Initiative framework. NPL Monitor is published on the Vienna Initiative website, alongside two other reports prepared by international financial institutions: the Deleveraging and Credit Monitor by the IMF and the Bank Lending Survey by the EIB.

The NPL Monitor for the first half of 2022 finds a decline in the NPL ratio over the course of 2021. As of 31 December 2021, the region’s NPL ratio fell by 0.5 percentage point from end 2020 reaching at 2.8 per cent, the lowest level since the NPL Monitor was first published in 2016.

While the immediate impact of COVID-19 on financial-sector soundness and bank asset quality in the CESEE region seems moderate and manageable so far, the pressures on asset quality are building. The Monitor warns that concerns still remain, “some of the effects of the pandemic on NPLs might, at least in part, be delayed and may still materialise as the benefits of support measures wane”.

One of the main challenges for banks will be to “understand the actual impacts on credit risk associated with second or third round effects from the Russia’s war on Ukraine. This includes the various macroeconomic implications such as inflation, rising energy prices, and the expected disruptions in supply chains”, the report finds.

EBRD Vice President, Policy and Partnerships, Mark Bowman said: “The findings of the latest NPL Monitor show that the financial sectors of CESEE region have remained resilient to the Covid-19 pandemic, but it is clear that there are more challenges to come. The report sends a clear message that regulators and banks need to act now and take the necessary pre-emptive measures to prevent a new build-up of NPLs.”

Other findings of the report include:

At regional level, NPL volumes fell 6.8 per cent in the 12 months from Q4 2020 to Q4 2021.

Similar to the trend in NPL volumes, NPL ratios continued to decrease in 2021 in most countries in CESEE reaching 2.8 per cent as of 31 December 2021, its lowest level in recent years.

On aggregate in the CESEE region, the average NPL coverage ratio also remained relatively strong in the 12 months period, at 64.6 per cent as of 31 December 2021, unchanged from 31 December 2020.     

According to the European Banking Authority, stage 2 loans share of loans is still at higher level at 11.2 per cent, compared to pre-pandemic figures. The Vienna Initiative countries in which the share of stage 2 loans increased most since 31 March 2020 – beginning of the C-19 OVIDpandemic – to 31 December 2021 were Bulgaria, Croatia, and Hungary.

Hospitality sector hit hardest by the Covid-19 crisis, and still accounts for a large share of NPLs. This sector experienced the biggest increase in NPL ratios in the EU-CEE region by 4.7 percentage points, rising from 7.5 per cent to 12.2 per cent.

Overview of the NPL profile in CESEE, 31 December 2020 to 31 December 2021