The number of eurozone businesses and households unable to repay their bank loans is set to rise, according to EY’s first 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 EMEIA Financial Services at EY, comments: “Although the next two years will see more moderate loan growth rates than those seen during the height 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 crucial moment in time when financial institutions and policymakers must continue to support each other to meet the challenges ahead.
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.
Corporate appetite to borrow is weakened by geopolitical uncertainty and ample liquidity
EY’s European Bank Lending Economic Forecast forecasts growth in net loans to eurozone businesses of 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 pre-pandemic growth rates, 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.
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.
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.