Corporate, SME loans to take brunt of Covid shock, say EU banks

More than half the respondents to the European Banking Authority’s latest risk survey say loans to small and medium-sized enterprises are likely to sour over the coming year. But they also expect to increase lending to this sector.

Out of 50 banks polled, 58% expect SME loans to deteriorate, and 52% that these portfolios will grow over the next 12 months. Fifty per cent also predict corporate loans will degrade, with 56% saying they’re likely to see these books increase.

Outlooks on the creditworthiness of all portfolios asked after by the EBA worsened from the last survey, published in Q4 2019. Back then, just 32% of banks expected SME portfolios would degrade.

 

The forecast for residential mortgages darkened the most between periods. In Q4 2019, 9% said they expected these types of loans to deteriorate, compared with 38% in the latest survey.

A larger percentage of banks polled this time around said they expected their trading portfolios to shrink rather than grow over the next 12 months, 12% to 8%. Twenty-six per cent also said their asset financing portfolios would reduce, compared with 16% which said they’d grow.

 

What is it?

The EBA conducts a twice-annual Risk Assessment Questionnaire, which gathers banks’ outlooks on profitability, cost of capital, funding, liquidity and asset quality, among other things. The spring 2020 survey covered 50 banks and 10 market analysts. Results were received in March and April.

Why it matters

It’s no surprise that banks’ credit outlooks have deteriorated – the unprecedented economic impact of the coronavirus crisis is expected to lead to a wave of business bankruptcies, despite the rash of European Union-wide and member state-level relief measures. In Q2, the eurozone economy plunged a shocking 12.1%.

What will reassure policy-makers, however, is that the banks polled expect their lending books to grow despite their gloomier credit forecasts. This may be a sign that EU efforts to stimulate bank lending, by extending capital relief and amending rules over the provisioning of delinquent loans, are working. 

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