Fixed Income Analysis /

Sector Flash - Banks: EBA 3Q20 update on loan moratoria shows diverging picture across European countries

    Michael Teig
    Michael Teig

    Deputy Head of Financials Credit Research

    19 January 2021
    Published byUniCredit
    • In its 3Q20 Risk Dashboard, the EBA has released aggregated data on loan payment moratoria. In the following, we take a look at this data.
    • The data reveals that loans under non-expired moratoria declined from around EUR 810bn in 2Q20 to around EUR 587bn in 3Q20, which represents a qoq decrease of 28% on the aggregated level. Loans under non-expired moratoria in Germany (down 50%), France (down 47%) and Spain (down 44%) declined materially qoq, while the decrease was much less pronounced in Italy (down 4%), and Portugal even showed an increase (up 7%). This is likely because both Italy and Portugal extended their moratoria schemes. Accordingly, the share of loans with payments still being deferred (vs. expired moratoria) was still high for these two countries at the end of 3Q20, with Portugal at 97% and Italy at 83%. It was also high for Sweden (97%) and Belgium (90%). By contrast, moratoria on the majority of loans have expired in Germany (63%), Ireland (58%), Spain (56%) and France (50%).
    • In contrast to the declining total loan moratoria trend, the share of stage-2 loans under non-expired moratoria rose qoq, from 16.7% to 20.2% on average, with relatively large increases observed for Belgium and Ireland (both up 11pp). Likewise, the share of NPLs under non-expired moratoria increased by 0.5pp qoq on average, to 3.0%, with Ireland (up 2.3pp) and Spain (up 1.5pp) among the countries showing the largest increases. More interestingly, on average only 2.6% of loans that exited moratoria migrated into NPLs and 17% became stage-2 loans. Again, dispersion across European countries is high. The NPL share of loans exiting moratoria ranged from 0.9% for Finland to 5.4% for Belgium and 7.0% for Ireland (not considering countries out of our coverage such as Greece, which shows a striking 28% share of NPLs). Plotting the share of NPLs (and stage-2 loans, respectively) with expired moratoria against that of NPLs with moratoria still in place suggests that loans out of moratoria have somewhat better credit-quality metrics than loans that are still under moratoria.
    • Our view: The COVID-19 pandemic has placed European banks under strain, but the full effect of the pandemic has yet to be felt, as COVID-19-related support measures have shielded asset quality deterioration so far. We expect rising NPLs during the course of 2021 and in 2022, but it remains to be seen to what extent the expiry of support programs will ultimately materialize in asset-quality parameters. Obviously, the picture across European countries is far from uniform. While the data provided by the EBA includes only EBA-compliant moratoria and excludes bilateral loan payment deferrals that are not EBA compliant, it suggests that banking systems in Portugal and Italy are among the most vulnerable in Europe in this regard. In some countries (such as Ireland and Italy), the exit of moratoria is optional, and we think the more-solvent borrowers more likely made use of this option. Although we expect higher-than-normal cost of risk in the coming quarters, many European banks have indicated that it will likely be lower in 2021 than last year, while the recent increase in COVID-19 infections and the resumption of containment measures in many countries might result in additional provisioning and further asset-quality deterioration.