Assets: volume and composition

Asset growth driven by increase in loan and debt securities and partly offset by decrease in cash balances

EU/EEA banks' risk appetite remained constrained by the uncertain macroeconomic conditions and rising geopolitical tensions, hindering substantial balance sheet growth. In June 2024, EU/EEA banks reported total assets of EUR 27.9 tn, which reflected an increase of 1.2% (or EUR 327 bn) since June 2023.

The assets’ development during this period was mainly the result of an increase of close to EUR 404 bn (+2.4%) in loans and advances (mainly due to an increase towards credit institutions and other financial corporations). A notable increase in debt securities (EUR 321 bn, +9.3%) and in equity holdings (EUR 152 bn,+37.6%) was also reported.  Outstanding total loans reported by EU banks were above EUR 17.5 tn. Following a couple of years of deceleration, the YoY loan growth rate reversed above its historical trend of 2.0%. The rise in reported debt securities was mainly attributed to a significant increase of EUR 275 bn recorded in the first half of 2024, bringing the total exposure of EU/EEA banks to debt securities to EUR 3.8 tn by June 2024. This trend may have resulted from banks aiming to capitalise on higher interest rates, before central banks began to tighten their monetary policies. While the increase in debt securities was broader based for the sector, the increase in equity holdings was mainly attributed to only a few French banks.

The above increases in assets were partly offset by the continuing declining cash balances (decrease of EUR 414 bn, -11.1%), mainly due to the latest repayments of the ECB’s TLTRO facilities, and lower derivative exposures (EUR 240 bn, -14.1% YoY). Despite the significant reduction in their cash balances, banks still reported EUR 3.3 tn of cash balances in their books, which is still 14% higher than the levels recorded in June 2019, contributing to the still comparatively robust liquidity ratios reported (see Chapter 3) (Figure 11).

Source: EBA supervisory reporting data

Source: EBA supervisory reporting data

Lending is slightly recovering as banks cautiously provide new loans

As of June 2024, EU/EEA banks reported exposures towards SMEs of EUR 2.6 tn (+0.4% YoY), while CRE loans stood at EUR 1.4 tn (+1.8% YoY). Outstanding loans towards large corporates were up by 0.7%. In total, loans towards NFCs were up by 0.6% YoY and accounted for EUR 6.3 tn. Despite some improvement, the growth of loans to NFCs was still subdued due to sluggish net demand for loans from both SMEs and large companies across the EU. This decline was mainly due to elevated interest rates and weak fixed investment. Supply-side influences were also significant in the first half of 2024, as banks maintained stringent credit standards for loans and credit lines to businesses in all sectors. By contrast, firms’ net demand for loans increased moderately in the third quarter of the year, for the first time since 2022, driven primarily by declining interest rates. In the first two quarters of the year, the net tightening reported in bank lending surveys was especially evident in CRE related exposures. This is line with the findings of the last few EBA’s RAQ, in which the most banks plan to maintain their current levels of exposure towards CREs or reduce them. Consequently, the significant rise in outstanding loans secured by CREs is likely due to providing support to existing customers through restructuring (please see Chapter 2.2. on forborne CRE loans), rather than increasing lending to new customers.

Sector-level data also shows that the main driver of the modest increase in EU/EEA banks' loans towards NFCs was a surge of nearly EUR 33 bn (+2.1% YoY) in loans to real estate activities. Additionally, NFC lending was also supported by the notable increase of EUR 19bn in loans to the information and communication sector, which exhibited the most pronounced YoY percentage growth across all sectors (+9.9% YoY). Despite the substantial increase in banks' involvement in financing technological industries, supplementary funding from other financial intermediaries and sectors, such as capital markets, will probably be needed to bolster the EU’s digital transition strategy (Figure 12).

Total loans towards households accounted for close to EUR 7 tn (+0.7% YoY), of which EUR 4.5 tn (+1.2% YoY) were loans collateralised by RREs and EUR 1 tn (+3.7% YoY) credit for consumption. According to lending surveys, the net demand for house purchase loans demonstrated a modest recovery in the first half of the year, before experiencing a more pronounced surge in the third quarter. This was largely attributable to the improvement in the housing market conditions for buyers, and the developments in interest rates. The improved consumer confidence exerted a favourable, albeit minor, influence on demand for housing loans. Consumer confidence, together with improved spending on durable goods, also boosted demand for consumer credit, which increased despite the concurrent tightening of banks’ credit standards. As a result, outstanding credit for consumption increased by close to EUR 36 bn, registering annual growth rate above the historical trend of the last 5 years (Figure 12). In the fourth quarter of 2024, euro area banks anticipate a significant easing of credit standards on housing loans, which, together with demand-side factors, should foster a further notable increase in demand for house purchase loans, supporting the recovery from the low levels reached in 2022 and 2023. A further increase is also projected in the demand for consumer credit, despite an anticipated further slight tightening of credit standards^[1].

Source: EBA supervisory reporting data

Figure 12b: Growth in loans and advances by segment, with a focus on HHs

Source: EBA supervisory reporting data

The diverse macroeconomic conditions across countries in the EU/EEA and the unique market dynamics in each country resulted in varied growth trends in loan volumes by segment at the national level. For example, German banks reported a marginal increase in their outstanding loans to NFCs (+0.4% YoY), while they recorded a slight decrease in their outstanding loans to households (-0.7% YoY). Similarly, French banks also reported a decrease of 0.8% YoY in lending to households while an increase of 0.3% in lending to NFCs. In contrast, Italian banks exhibited a more pronounced decline in both loans to households (-1.2% YoY) and loans to NFCs (-5.7% YoY). The latter was mainly driven by a considerable contraction in lending towards SMEs, which declined by 8.0% YoY. Notwithstanding the considerable diversity among country-level developments, most jurisdictions observed an expansion in consumer credit. Spanish banks reported the most notable surge, increasing their consumer credit exposures by EUR 19.1 bn (+6.4% YoY).

The collateral valuations of real estate assets should reflect the current market conditions

The EBA’s RAR of July 2024^[2] included a dedicated section on potential risks stemming from CRE exposures, in which it highlighted the diverse nature of CRE exposures and underscored the necessity for greater clarity regarding the types of CRE assets to which EU/EEA banks have extended loans. The Autumn 2024 RAQ reveals that banks in the EU/EEA are heavily invested in the office and multifamily sectors, while their investments in the retail sector, including shopping centres, are comparatively smaller. Banks in Northern and Western European regions are primarily exposed to office and multifamily properties, whereas banks in the Southern region reported a higher share of CRE-related loans towards retail properties (Figure 13).

Considering the recent price adjustments in the CRE sector, particularly within the office category, it is imperative for banks to understand the importance of timely and prudent collateral valuation. Supervisors have indeed increased their oversight of these valuations^[3] as part of a broader initiative to address structural weaknesses in banks’ credit risk management systems^[4]. The EBA supervisory data reveals that, even following the recent adjustments in CRE valuations, LTVs of loans secured by CRE reported by EU/EEA banks has shifted marginally towards a lower risk profile. As of June 2024, nearly EUR 920bn of outstanding CRE loans had a LTV of less than 60% (around 904bn in June 2023), while approximately EUR 520 bn had a LTV above 60% (with EUR 150 bn exceeding a LTV of 100%). Banks reported a decrease in volumes within the higher-risk cohorts (EUR -15bn in CRE loans with a LTV > 80%), whereas the volume of CRE loans in lower-risk cohorts increased by more than EUR 40 bn. This data suggests that either EU/EEA banks are primarily increasing their exposure to highly collateralised CRE loans while steering clear of new financing with lower collateral valuations, or failing to accurately update the valuation of the underlying collateral (Figure 14).

Amid escalating concerns over the sustainability of sovereign debt, European banks are increasing their investment in sovereign debt holdings

The level of interest rates reached last year raised concerns about the sustainability of long-term sovereign debt due to anticipated higher refinancing costs. Banks holding substantial government bonds are exposed to sovereign risk in case of financial turmoil. This could lead to a sharp decline in bond values, reducing profitability and undermining banks’ balance sheets.

For EU/EEA banks, total sovereign exposures typically exceed twice their equity on average, with certain banks holding exposures multiple times higher than their equity. As of June 2024, EU banks reported more than EUR 3.5 tn in total exposures to sovereign counterparties, which indicates a nearly 6% rise from December 2023 (EUR 3.3 tn) and roughly EUR 140 bn more than the previous year (EUR 3.4 tn)^[5].

Half of these amounts refer to domestic counterparties, while about a quarter are assigned to other EU/EEA countries. Greater exposure to sovereign debt, combined with an increased domestic bias, makes banks more vulnerable to elevated sovereign risk. On the other hand, higher interest rates, and therefore higher yields on sovereign bonds, offer banks the opportunity to refinance maturing sovereign exposures, predominantly fixed-rate bonds, at more advantageous rates, positively impacting their future profitability. EU/EEA banks’ sovereign debt maturity profile leans towards longer terms, with at least 46% of holdings maturing in over 5 years and 31% within 1 to 5 years. This maturity profile suggests that taking advantage of refinancing maturing debt can be a slow process and differs significantly across country (Figure 15).

About 58% of EU/EEA banks’ exposures to sovereigns were reported at amortised cost, with around 20% at fair value, and 18% held for trading. The latter two categories directly impact the profit and loss and OCI statements, making profitability and OCI sensitive to changes in sovereign debt yields, especially for longer-duration instruments. Notably, the average classification at amortised cost was below 50% in only six countries: Germany, Denmark, Ireland, the Netherlands, Norway, and Romania.

A mixed and incomplete picture to-date on banks’ green exposures

Insights into banks’ exposures to green assets can be gained from data collected on Pillar 3 ESG disclosures^[6]. Most recent data reveal taxonomy alignment of EU banks’ overall banking book generally remains modest as of December 2023. Both single asset classes (such as NFC and household) green asset ratios (GAR) and total GARs^[7] are low, with the majority of banks reporting total GARs below 2%. EU average weighted total GAR stood at just under 3% as of end of 2023^[8].  Given the limitations of the GAR and its dependence on specific portfolio compositions, these numbers cannot provide a full picture of banks’ engagement in green activities.

In relation to banks’ green exposures to the loan segment collateralised by immovable property, the share of green exposures is showing positive signs. The majority of loans collateralised by immovable RRE and CREs for which energy efficiency performance is provided, are reported in the two highest performing energy efficiency buckets, even though only a minor portion meets the top standard of less than 100 kWh/m2. On the other hand, low exposure shares are reported in the bottom two energy efficiency buckets (less than 20% for all but two banks and in most cases even below 10%). However, the share of the mortgage portfolio for which energy efficiency performance is disclosed varies widely across banks, and the share of exposures for which energy efficiency is based on estimates tends to be very high, with most banks using estimates for more than half the exposures for which energy performance numbers are provided. This leaves the picture exploratory and incomplete to date.

Physical risks impact financial institutions

The recent floods in Spain, previously in Central Europe, and heatwaves during last summer across Europe reflect the increasing frequency and severity of extreme weather events. These events inflict economic damage, disrupt communities and challenge business continuity, especially for financial entities facing direct and indirect impacts.

Directly, climate events can damage assets and infrastructure, causing financial losses for banks and insurers with holdings in flood-prone areas, for example. Indirectly, they can trigger economic and market disruptions - such as in agriculture - affecting commodity prices and leading to increased insurance claims or loan defaults due to supply-chain disruptions impacting businesses.

Box 4: 'Fit-For-55' climate scenario analysis The first system wide climate exercise shows that transition risk losses alone unlikely to threaten EU financial stability. As part of its 2021 Strategy for financing the shift to a sustainable economy, the European Commission requested that the ESAs and the ECB conduct a one-off ‘Fit-for-55’ climate risk scenario analysis, targeting banks, investment funds, occupational pension funds, and insurers. The objective is to assess the resilience of the EU financial sector to climate and macroeconomic financial shocks, while the Fit-for-55 package, which aims to reduce EU emissions by at least 55% by 2030, is smoothly implemented in the EU. The ESRB, in close cooperation with the ECB, developed three scenarios, one baseline and two adverse scenarios. One adverse scenario focuses on climate-change related risks that already materialise in the near term, in the form of asset price corrections triggered by a sudden reassessment of transition risks, so called ‘run on brown’ . A second scenario combines such climate-change related risks with other stress factors, as far as possible consistent with scenarios of the EU-wide stress-testing exercises. In all three scenarios the Fit-for-55 package is assumed to be successfully implemented by 2030 as planned. The ESAs and the ECB employed top-down models to measure the impact of the scenarios on the respective sectors (first-round effects) and to assess the potential for contagion and amplification effects across the financial system (second-round effects). The results of the exercise show that estimated losses in the near term, stemming from a potential ‘run-on-brown’ scenario have a limited impact on the financial system. This means that perceived changes in climate risks alone, as reflected in the scenarios, are unlikely to trigger financial instability. The overall system-wide losses, which include both first and second-round effects, represent 5.3% of total exposures in the baseline scenario and rise to 8.7% under the first adverse scenario. Losses specific to the banking sector account for 5.8% and 6.8% in these respective scenarios. The interaction of adverse macroeconomic developments with climate risk factors could substantially increase financial institutions’ losses, thereby leading to disruptions in financing the ongoing transition. This is assessed in the second adverse scenario where the “run-on-brown” is coupled with adverse macroeconomic conditions. In this scenario, the losses across the entire system and also including cross-sectoral amplification effects, can reach up to 20.7% of total exposures. Amplification effects vary widely across sectors. In the simulation, investment funds experience more severe liquidity pressures due to redemptions, leading to fire sales of assets. This mechanism affects the funds’ value and further impacts the price of securities held by financial institutions in the three sectors. Insurance corporations are mainly affected by the channel of fund share revaluations while banks have a relatively lower exposure to funds, which explains the more contained total[9] impact (11%) compared to other sectors[10] (Figure 16). Source: EU-wide cross-sectoral assessment of climate-related financial risks This exercise represents a significant step forward in the realm of climate stress testing, mainly in complexity and the incorporation of interconnected elements. Nevertheless, these estimates rely on several crucial assumptions, particularly concerning the second-round effects. Modelling uncertainty could also affect results, as the scenario construction itself involves highly detailed macroeconomic modelling. Differences in data coverage and dependence on various data sources increase the overall uncertainty of the findings. Despite inherent limitations, the exercise endeavours to maintain consistency across sectors, both in scope and methodology. The preparedness and adaptability of institutions in managing climate-related risks can significantly contribute to drive the economy towards the net-zero target by 2050 and avoid the impacts of extreme weather events, sea-level rise, and natural disasters. To drive Europe’s green transition and ensure long-term sustainability and resilience in an unpredictable global landscape, a thorough risk management strategy that includes both transition and physical risks, along with the efficient and strategic allocation of financial resources, is crucial.

Asset quality trends

Slight, yet noticeable decline in asset quality

By June 2024, banks in the EU/EEA reported EUR 373 bn in NPLs, accounting for 1.86% of their total loans and advances. This marks an increase of over EUR 12 bn (+3.4%) from June 2023. Although NPLs have been rising steadily over the past 18 months, the rate of increase has been slow and originates from historically low levels in the EU banking sector.

Although banks in most of the EU/EEA countries reported an increase in their NPLs, for several countries the YoY increase was more pronounced. German banks reported the largest increase in stock, approximately EUR 8 bn (+23%). Romanian, Icelandic and Swedish banks observed the highest YoY growth rates in NPLs at +54%, +43% and +40%, respectively^[11]. Conversely, Greek and Italian banks saw a marked reduction in their NPLs, about EUR 2.5 bn, during the second half of 2023, though these figures stabilised in the first half of 2024. Polish banks recorded the highest NPL ratio at 3.8%, followed by Greek banks at 3.4%.

In the first half of 2024, EU/EEA banks recorded inflows of NPLs amounting to over EUR 113 bn, while outflows were limited to EUR 103 bn. Although the outflows were consistent with those in the first half of 2023, the inflows saw an increase of more than EUR 6 bn. Unlike the first half of 2023, in which inflow of NPLs was attributed solely to households, the net inflow of NPLs since June 2023 was primarily driven by NFC defaults. These defaults were largely seen in French banks (mainly SMEs) and German banks (through CREs). For households, the most NPL inflows were attributed to French banks, predominantly from consumer credit (Figure 20)

Credit risk may pose a greater threat to smaller institutions

Smaller banks typically exhibit lower asset quality compared to their larger counterparts. The weighted average NPL ratio of banks with assets less than EUR 20 bn was 3.4%, while for banks for which their assets exceeded EUR 100 bn was 1.9%. The NPL ratio of medium-sized banks was 2.1%. Several factors contribute to this discrepancy. For instance, smaller banks often pursue higher-margin lending practices by targeting riskier segments, such as SMEs and consumer credit, which naturally involve greater risks. This involves offering loans to individuals with higher risk profiles, albeit unintentionally. Additionally, smaller banks frequently face high asset concentration due to their limited ability to diversify their portfolios. Moreover, their risk management practices are generally less advanced than those of larger banks, and they have restricted access to risk mitigation tools like securitisations and government programmes (Figure 21).

(*) Data of the charts is based on all credit institutions of EUCLID. For the list please refer here Registers and other list of institutions | European Banking Authority (europa.eu)

The allocation for Stage 2 remained at high levels

EU/EEA banks reported a 4.6% increase in stage 3 loans compared to the previous year, reaching EUR 350 bn by June 2024. Similarly, stage 2 loans saw a 4.5% YoY rise, driven mainly by developments in the second half of 2023, and totalled nearly EUR 1.5 tn in June 2024, representing 9.3% of all loans.

Reported trends in asset quality showed significant variations across countries. These differences arose from the asset composition of banks in each country, the proportion of fixed-rate to variable-rate loans, and their respective economic conditions. For example, banks in France, Germany, and Spain reported a downgrade in loan quality (from stage 1 to stage 2 and stage 2 to stage 3), while banks in Belgium and Austria presented a more mixed picture, reporting both an upgrade of loans from stage 2 to stage 1 and a shift of loans from stage 2 to stage 3. German banks saw stage 2 loans rise by nearly EUR 62 bn (+30%), and French banks experienced an increase of EUR 31 bn (+7%). Conversely, Italian banks saw a drop in stage 2 loans by approximately EUR 30 bn (-17%).

Certain segments exhibit elevated credit risk

The asset quality deterioration was not only country-specific driven but was also driven by certain segments. Stage 2 allocation was notably high for CRE loans, with 18% of the CRE loans designated in Stage 2 (up from 16.7% in June 2023). CRE also had an increased NPL ratio (4.4% vs 3.9% a year earlier). Consumer credit had the highest NPL ratio (5.4%), though only 9.7% of consumer credit was reported in Stage 2. Credit quality also worsened for SMEs, with 14.9% of SME loans reported in Stage 2 and 4.6% classified as NPLs, notably higher than a year earlier (14.1% and 4.3% respectively). This is significantly higher than the NPL ratio for large corporates, which stood at 2.6% (Figure 22).

Supervisory reports indicate a marked decline in the quality of assets related to NFC in the real estate sector. Banks in the EU/EEA have reported a 39% rise in NPLs within the real estate sector since June 2023, amounting to an increase of over EUR 12 bn in NPLs for this sector. The information and communication sector experienced the second highest increase in NPLs in absolute terms among sectors, although this was less than EUR 2 bn.

Banks’ supervisory data reconciles to some extent with the market data on insolvency rates. In June 2024, the seasonally adjusted number of declarations of bankruptcies increased by 12.2% in the EU, compared with June 2023. This was mostly driven by the construction sector, which exhibited a YoY surge of 14.8%. Notable increases were also reported by the financial, insurance and real estate sector (+12.2% YoY), as well as the information and communication sector (+11.3% YoY), substantiating the deterioration of asset quality reported by banks for these sectors (Figure 23).

The country-level developments were characterised by a certain degree of heterogeneity, with  most of jurisdictions witnessing an uptick in the number of bankruptcy filings. In June 2024, Croatia and the Netherlands observed the largest YoY percentage increases (+41.9% and +34.2%, respectively), while Latvia and Estonia reported a decrease, albeit more modest (-11.9% and -7.1%, respectively).

Forbearance and provisioning developments point to potential further, albeit limited, asset quality deterioration

Banks in the EU/EEA reported EUR 283 bn in loans under forbearance measures, accounting for 1.4% of their total loan portfolio, which is slightly lower than the previous year's figure of EUR 291 bn. Over 60% of these forborne loans were towards NFCs, with approximately EUR 70 bn to CREs. Notably, forborne loans secured by CRE have risen by about 5% over the past year. This was the only segment that banks reported an increase in forborne loans on a yearly basis, demonstrating not only the heightened risk of the CRE segment but also the proactive handling of distressed borrowers during the upheaval of CRE markets.

The coverage ratio for NPLs has continued its decline, reaching 42% (down from 42.9% in June 2023). As of June 2024, banks within the EU/EEA reported EUR 238 bn in total provisions, with EUR 157 bn allocated to NPLs. Despite an uptick in their NPLs, banks have not matched this with proportional increases in provisions, perhaps due to the pre-existence of overlays assumed in previous years. The coverage ratio for performing loans was 0.41% (compared to 0.44% in June 2023).

Overall, the total provisions of EU/EEA banks decreased by 1% YoY, mainly due to a 6% decrease in provisions for performing loans, while provisions for NPLs slightly increased by 1%. Specifically, EU/EEA banks saw a 5% YoY increase in provisions for CRE related performing loans. Meanwhile, the modest rise in provisions against NPLs was primarily driven by consumer credit and CRE related provisions.

Based on the findings from the Autumn 2024 RAQ survey, a considerable portion of banks anticipate a generalised decline in asset quality over the next 6 to 12 months. The deterioration is primarily expected in the consumer credit, SME, and CRE sectors (approximately 40%). However, when compared to the same survey conducted a year earlier, this percentage has significantly decreased. Additionally, the outlook for loans secured by RRE has shown substantial improvement (only 20% of banks expect asset quality deterioration), indicating a stabilisation in the housing markets across the EU/EEA (Figure 24).

With an uncertain macroeconomic outlook and rising geopolitical risks, banks face potential threats to credit quality. Banks must stay alert and factor in these economic challenges in their credit risk assessments, ensuring thorough evaluation of borrowers' repayment ability. Timely identification of distressed debtors, adequate provisioning, and recognising loan losses are crucial, along with proactively managing such issues through forbearance or other measures.

Abbreviations and acronyms