DBRS Morningstar: European Banks Report High Cost of Risk in FY20, but Little Impact on Asset Quality To Date

DBRS Morningstar has released a commentary on the cost of risk (CoR) and NPLs reported by a sample of 39 banks in Europe in 2020, including banks in France, Germany, Italy, the Netherlands, Spain, Sweden, Norway, Portugal, Denmark, Finland, Ireland and the United Kingdom (UK).

Key highlights from DBRS Morningstar’s commentary include:

• European banks reported a doubling of loan loss provisions in FY20 compared to the prior year, leading to a material increase in the banks’ cost of risk in 2020.

• The high cost of risk largely reflected the update of credit models to incorporate the economic shock in H1 2020 and most banks subsequently reported significantly lower levels of provisions in Q3 and Q4.

• The banks' asset quality metrics however, have shown little impact to date and a large proportion of banks reduced their Non-Performing Loans (NPLs) Year -on-Year.

“The measures implemented by governments and regulators to mitigate the effect of the economic disruption caused by the pandemic, continue, in our view, to prevent a rapid increase in NPLs and are delaying a new wave of asset quality problems at European banks. With some countries extending their lockdown periods into the first months of 2021, we expect European banks to continue reporting high levels of cost of risk in 2021 but this will depend on the pace of further economic deterioration and the increase in the number of customer defaults, particularly if support measures are discontinued.” said Maria Rivas, Senior Vice President from the DBRS Morningstar Financial Institutions team.

The commentary focuses on the Cost of Risk results of European banks at end-2020. The full commentary “European Banks Report High FY20 Cost of Risk, but Little Impact on Asset Quality So Far” is available at www.dbrsmorningstar.com.