LONDON (Reuters) - The scale of bad loans held by banks in the European Union is “a major concern” and more than double the level in the United States, despite an improvement in recent years, the EU’s banking regulator said on Tuesday.
Non-performing loans (NPL) across Europe’s major banks averaged 5.6 percent at the end of June, down from 6.1 percent at the start of the year. But that compares with an average of less than 3 percent in the United States and even lower in Asia, according to the European Banking Authority (EBA).
The total of NPLs across Europe is about 1 trillion euros ($1.1 trillion), equivalent to the size of Spain’s annual gross domestic product (GDP) and 7.3 percent of the EU’s GDP.
Tuesday’s figures were the first time detailed data on NPLs, defined as a loan that is more than 90 days overdue or where problems are spotted earlier, have been released in Europe. The EBA data covered 105 banks, spanning 20 EU countries and Norway.
Some 16.7 percent of loans at banks in Italy were designated as NPLs, equivalent to 17.1 percent of the country’s GDP. Spain’s banks had an average NPL ratio of 7.1 percent, or 15.8 percent of its GDP.
Banks in Cyprus fared even worse, with half of their loans classified as bad, followed by Slovenia (28.4 percent), Ireland (21.5 percent) and Hungary (18.9 percent).
“Although gradually improving, quality of assets remains a major concern in the EU and an impediment to new lending and banks’ profitability, particularly in countries already under economic stress,” the EBA said.
Banks in Sweden had the lowest level of NPLs at an average of 1.1 percent, followed by Norway (1.4 percent), Finland (1.7 percent), Britain (2.9 percent), the Netherlands (2.9 percent) and Germany (3.4 percent).
The regulator said the scale of bad loans needed to be tackled because banks typically lend more when their bad loans are lower and their capital is higher, so reducing NPLs should increase lending to companies and help Europe’s recovery.
The findings were part of a ‘transparency exercise’ conducted by the EBA this year, instead of a more intensive ‘stress test’ of lenders, aimed at shining a light on areas of weakness.
Analysts are expected to use the data to conduct their own number-crunching on banks to spot potential vulnerabilities or what EBA calls imposing “market discipline” on lenders.
The regulator said European banks have shown improvement in almost all other areas in recent years, including capital, leverage ratios and profitability.
There are signs the banking sector is turning a corner as policymakers fret at how valuations of lenders in Europe lag those of their U.S. rivals, which are stealing market share.
Profitability, as measured by return on regulatory capital, improved to an average 9.1 percent at the end of June from zero at the end of 2013. But that is still below the more than 10 percent banks believe is needed to cover the cost of capital on a sustainable basis.
Some countries lag badly, with the return on capital in Germany, the EU’s biggest economy, at just 6.2 percent.
In other signs of improvement, the average core equity ratio of capital to risk-weighted assets rose to 12.8 percent, from 9.7 percent at the end of 2011. The ratio dips to 11.8 percent when applying all the new capital requirement rules.
This is well above mandatory minimums for even the biggest banks.
Much of the increase is due to fresh capital rather than cuts in lending, with total capital up by 232 billion euros since 2011, equivalent to the GDP of Finland or Denmark.
The aggregate leverage ratio, a measure of capital to all assets on a non-risk weighted basis, was 4.9 percent, well above the current minimum of 3 percent that will be binding from 2018.
Global regulators are reviewing the minimum leverage ratio, with banks betting on 4 percent or higher in Britain, the United States and Switzerland.
($1 = 0.9398 euros)
Editing by Mark Potter