European Banks: Healthy Balance Sheets

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Despite a less favorable economic environment (monetary tightening, end of state aid linked to the health crisis), data on bank credit continues to improve in the euro zone. The level of “Non-Performing Loans” (NPLs), which have been outstanding for three months or more, continues to fall. The figures for Q1 2022, published by the EBA at the beginning of July, show an average NPL rate of only 1.9% in eurozone banks. This rate was still 6% seven years ago.


The decrease in the NPL ratio reflects the consolidation of the banking sector’s balance sheets. This consolidation continued in Q1 2022 despite the end of the moratoria and a situation already marked by the return of inflation, the war in Ukraine, and slowing growth. More generally, banks seem well prepared for a possible downturn in the economy, thanks to the efforts made in recent years to clean up their balance sheets and to be well capitalized.

Despite this solidity, European banks have seen their risk premium on the bond markets increase significantly since the beginning of the year. In the Euro-denominated financial subordinated debt segment, AT1 securities, aimed at investors able to assess their risks, are currently offering yields above 9% per annum on average1. In the less risky Tier 2 segment, the safest investment grade banks are themselves borrowing at rates close to 5%1. In our view, such yields from well-capitalized institutions can be attractive to qualified investors with a long-term perspective.


The opinion expressed above is dated July 8th, 2022 and is subject to change.

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