Last updated: October 29, 2013 12:00 am

Troubled loans at Europe’s banks double in value

European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising, according to analysis that provides a disquieting backdrop to the region’s forthcoming assessment of lenders’ balance sheets.

A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”.

Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets.

He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.

The PwC figures come after the European Central Bank this month unveiled plans for a comprehensive assessment of the health of the eurozone’s banking system as it prepares to take on responsibility to oversee the region’s banking sector.

The ECB’s probe will encompass a wide range of bank assets and will go on to subject balance sheets to “stress tests” aimed at assessing how resilient lenders are to shocks.

The review of banks’ asset quality will attempt to use more closely harmonised definitions of NPLs in a bid to offer greater clarity about the respective states of different euro-area banking sectors.

As things stand, cross-country comparisons are riddled with uncertainties because of the different methodologies used.

PwC’s figures, which are derived from lenders’ accounts, showed that Germany, the EU’s biggest economy, had the highest amount of non-performing loans at the end of 2012, at €179bn, unchanged on the previous year’s number.

Spain had €167bn of NPLs, up sharply from the €136bn recorded for 2011. Britain’s €164bn of non-performing loans represented a decline from €172bn in 2011.

Lee Tyrrell-Hendry, an analyst at Royal Bank of Scotland, said there was likely to be an increase in loan provisioning and sell-offs of distressed assets by banks as the ECB’s asset quality review takes its course over the coming months. “I expect the banks would accelerate the deleveraging process,” he said.

Mr Thompson said PwC was seeing increasing numbers of outside investors consider purchases of loan portfolios, with major US funds the most active but interest also coming from sovereign wealth funds and far-eastern investors.

“We know of over 150 different investor groups who are taking a close interest in this market,” he said. “As the banks try to position themselves to meet the Basel III capital requirements and react to the ECB’s stress tests following the asset quality review we expect more assets to come to market in 2014 and beyond.”

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