European Banks’ Cost of Risk Continues To Show No Major Signs of Deterioration in H1 2022

DBRS Morningstar has released a commentary on the cost of risk (CoR) of banks in Europe, including banks in Belgium, Denmark, Finland, France, Germany, Italy, Ireland, the Netherlands, Norway, Portugal, Spain, Sweden¸ and the United Kingdom.

Key highlights from DBRS Morningstar’s commentary include:

• European banks continued to report low levels of Cost of Risk in H1 2022, and lower than in FY21 and FY19 at most banks. Banks’ H1 2022 low Cost of Risk was not driven by releases of loan loss provisions.

• However, the consequences of the uncertain economic environment, higher interest rates, elevated inflation and supply chain issues could be more visible towards H1 2023, when we expect to see some asset quality deterioration and an increase in NPLs.

• We consider it is as less likely that we will see the same sudden increase in loan loss provisions as in FY 2020, as this was driven by the shutdown of economies globally.

“Increasing inflation and the Russia-Ukraine conflict and supply chain issues, have not yet made a visible impact on the Cost of Risk of European banks and most banks continued to report lower levels of CoR in H1, in most cases even lower than in FY21" said Maria Rivas, Senior Vice President from the DBRS Morningstar Financial Institutions team. "We expect the impact of these factors on asset quality and loan loss provisions could be more visible by H1 2023, although it is less likely that we will see the same sudden increase in loan loss provisions as in FY 2020, as this was driven by the shutdown of economies globally”.