Western EU banks’ 2Q21 results will start to reveal the true extent of asset quality deterioration due to the pandemic, Fitch Ratings says in a new report. So far this has been masked by loan moratoria but a clearer picture should start to emerge now that most have expired.
Fitch nevertheless expects loan impairment charges from loan moratoria to fall within the baseline estimates communicated in our 2021 outlook for western European banks.
Outstanding moratoria in major western EU economies comprised just 3.5% of loans to households and non-financial corporates at end-2020, down from 6% at end-3Q20 and well below the peak of 9%.
However, moratoria remain significant in Italy and Portugal, where they are set to run until June and up to September 2021, respectively, and further extensions are being discussed.
The proportion of loans still under moratoria classified as Stage 2 under IFRS 9 was 27% at end-2020, compared with 19% for loans that had previously been under moratoria and 9% for total loans. This points to the risk of more impairments as the remaining moratoria expire this year, particularly in countries that made greater use of moratoria, such as Greece, Ireland, Italy and Portugal.
Loan moratoria have allowed borrowers to suspend payments on debt without the usual consequences for bank asset quality. EU supervisors have given banks temporary forbearance from asset quality, capital and impairment rules, provided that moratoria schemes are broad-based, interest rates and other loan conditions unchanged, and no exposure is forgiven.
Banks have still been required to identify cases where obligors may face longer-term financial difficulties and classify loans accordingly to differentiate borrowers with short-term liquidity shortages from those facing structural difficulties.