Here’s PricewaterhouseCoopers’ (theoretical) non-performing loan (NPL) barometer:
If you’re a banking system, you want to be in Quadrant A — with a low percentage of NPLs that are relatively well-provisioned for, i.e enough money has been set aside to cover them.
Now guess where Europe is.
That’s a three-year migration from around Quadrant A to around Quadrant C — or a low-level of NPLs which “may not be relatively well provisioned for” in PwC parlance. Indeed, if you check PwC’s numbers, NPLs in 2007 were 2 per cent of total lending and provision coverage stood at 84 per cent.
Mid-way through 2010, bad loans stood at about 5 per cent of total lending and provisioning coverage had fallen to 50 per cent — a 40 per cent reduction since 2007 according to PwC.
The regional breakdown makes for pretty interesting viewing too.
Back in 2007, Ireland was just a tiny blip on PwC’s NPL screen — today it’s practically off the chart. Spain’s NPLs have also ballooned despite a new push by the central bank to boost provisioning. Beware also, of the Iberian loan modifications which can temporarily obscure loans destined for NPL bucket.
Some regional commentary from PwC:
Spain has moved from Quadrant A in 2007 to Quadrant C in 2010, highlighting the previous Banco de Espana policy that required banks to increase their provisions even as the level of NPLs remained stable. While regulation has changed in Spain requiring banks to provision against delinquent loans over a shorter period, this has been offset by the sharp increase in NPLs which has pushed Spain into Quadrant C. The German and UK markets, the largest in Europe, have seen similar movements to the bottom right of Quadrant C, highlighting that NPL levels have increased faster than provisioning levels. Our data suggests that Portugal is one of the few markets in Europe where NPLs have remained relatively stable over the 2007 to 2010 period. However, this partly reflects that Portugal has not experienced a property bubble to the same extent of other European neighbours. At the same time we understand there is also significant loan restructuring and modifications occurring, which have reclassified NPLs into performing loans.
Roll-on, NPLs.
Related links:
Reflections of a UK banks analyst - FT Alphaville
SocGen on depleted Spanish loan loss buffers - FT Alphaville
Loan loss reservations, US bank earnings - FT Alphaville
Banks’ coverage ratio capers, cont. – FT Alphaville