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European Banks Are in a Much Better Position Now Than When the Pandemic First Hit, Goldman Says

DANIEL ROLAND | AFP | Getty Images
  • In the aftermath of the pandemic, European governments put forward different measures to avoid a wider economic collapse.
  • These fiscal stimulus steps have prevented a big wave of insolvencies across the bloc, by extension staving off a worsening of European banks' balance sheets.

LONDON — European banks are in better shape now than at the start of the pandemic for two reasons, a Goldman Sachs analyst told CNBC on Wednesday.

"The non-performing loan ratios are down year-on-year, so compared to a year ago the portion of your book that is not performing has actually decreased," Jernej Omahen, head of European Financial Institutions research at Goldman Sachs, said.

Non-performing loans refer to credit that the borrower can no longer pay. These were a big part of the balance sheets of European banks in the wake of the 2008 and 2011 crises and have been one of the elements preventing profitability.

"Right now, part of the reason for that is structural," Omahen said, mentioning the de-risking efforts that European lenders have undertaken since the global financial crisis.

The second reason behind the improvement of the balance sheets "is just the reality of events, which also means that we've had substantial fiscal and monetary support for the economy and for the corporates," Omahen also said.

In the aftermath of the pandemic, European governments put forward different measures to avoid a wider economic collapse. These fiscal stimulus steps have prevented a big wave of insolvencies across the bloc, by extension staving off a worsening of European banks' balance sheets.

In addition, there has also been a vast amount of monetary stimulus to contain the economic shock from lockdowns and social distancing measures.

The latest data from the European Central Bank shows that non-performing loans have dropped from a peak of 1 trillion euros ($1.22 trillion) in 2016 to about 550 billion euros in mid-2020. This latest level of NPLs represented nearly 3% of the total level of loans across the European banking system in mid-2020.

However, the supervisory arm of the ECB has raised concerns about the stability of banks' balance sheets going forward.

"The economic crisis caused by the coronavirus pandemic is likely to trigger a sharp increase in non-performing loans: under a severe but plausible scenario they could reach levels as high as 1.4 trillion euros by the end of 2022," the supervisory body said on its website.

Speaking to CNBC last month, ECB Vice President Luis de Guindos said that the 19 nations that share the euro are facing financial risks that are elevated and uneven and more targeted stimulus could be required as the region recovers from the coronavirus crisis. 

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