European Banks' Q1 Cost of Risk Almost Back To Pre-Pandemic Levels, But Unlikely to be Sustained

This commentary analyses the cost of risk and non-performing loans reported by a sample of 32 banks in Europe in Q1 2021, including banks in France, Germany, Italy, the Netherlands, Spain, Sweden, Norway, Portugal, Denmark, Finland, and the United Kingdom.

Summary highlights of the report include:

• European banks reported significantly lower levels of cost of risk Year-on-Year in Q1 2021.

• Most banks even reported cost of risk approaching the pre-pandemic levels of FY19.

• European banks are not yet reporting signs of deterioration in non-performing loans in Q1 2021, but we view this as a reflection of the ongoing support from government measures.

‘With European countries coming out of economic lockdowns and rolling out vaccines, we consider that European banks’ cost of risk and non-performing loan levels in coming quarters will largely depend on the degree of economic recovery and rebound of business activity. However, we expect banks and regulators to remain prudent in their provisioning approach and in the recognition of early signs of asset quality deterioration. As a result, we consider it quite likely that European banks will report higher levels of cost of risk once non-performing loans start to materialise, although we consider that the full developments in asset quality will be more visible in the medium-term rather than in the short-term, given that most governments are still providing some support.’ said Maria Rivas from DBRS Morningstar’ Global Financial Institutions team.