Growth in European Banks’ Stage 2 Loans Poses Risks Amid Weakening Economic Outlook

DBRS Morningstar has released a commentary focusing on the growth in European banks’ Stage 2 loans.

Key points include:

• European banks continued to reduce Non-Performing Loans (NPLs) in H122, although at a slower pace.

• Stage 2 loans however, showed a steady increase, which partly reflects concerns about the Russia -Ukraine conflict, high inflation and uncertain economic environment.

• Some banks that reduced NPLs in H1 2022 reported a significant increase in Stage 2 loans in the same period.

“Most European Banks’ NPLs remain lower than pre-pandemic levels’, notes Maria Rivas, Senior Vice President, DBRS Morningstar. “However, the Russia-Ukraine conflict and deteriorating economic outlook for Europe, is resulting in an uptick of Stage 2 loans, and we see this as concerning given that these loans could ultimately develop into NPLs and require additional provisions.”