European Banks Saddled With $1.2 Trillion in NPLs

For European banks, it’s a headache that just won’t go away: the €944 billion ($1.17 trillion) of non-performing loans that’s weighing down their balance sheets.

Economists say the pile of past-due and delinquent debt makes it harder for banks to lend more money, hurting their earnings. European authorities are prodding lenders to sell or wind down non-performing credit, but they’re split on how to tackle the issue, and some investors are disappointed by the pace of progress, Bloomberg reported.

The problem is particularly acute in the countries that were hit hardest by the sovereign debt crisis. Greece, which has yet to exit its bailout program, tops the list of non-performing loans as a share of total credit, while Italy has the biggest pile of bad debt in absolute terms.

Italian banks have fixed goals for shrinking their bad credit levels by selling portfolios or winding down loans. Intesa Sanpaolo SpA, the country’s biggest bank by market value, got a head start on its rivals two years ago and plans to accelerate the reduction of non-performing loans, Chief Executive Officer Carlo Messina said last month. He says other Italian banks “are doing the right job” and should make further progress this year.

Italy amassed its pile of non-performing loans during years of little or no economic growth. The problem is compounded by the country’s legal system, where it takes lenders longer to liquidate collateral than in many other countries. Italy overhauled its bankruptcy rules in October to make them quicker and more efficient.

European banks overall have cut their non-performing loans by more than €280 billion since the end of 2014. The European Central Bank, which supervises most of the bloc’s big lenders, says bad debt is still “a major problem” which has to be addressed lenders while the economy performs well.

The flow of new bad loans is declining in Italy, but the level remains above that seen before the financial crisis. The Bank of Italy says an improvement in the country’s real estate market is helping to reduce the risks for banks. According to the central bank’s most recent financial-stability report, key vulnerability indicators for lenders should continue to decrease over the next few quarters.