Bad debts are peaking and pay falling at Europe’s banks

TWO YEARS ago banks began to include in their results announcements tables meant to show that their exposure to toxic securities was under control. The crisis has moved on: now one European financial firm’s presentation includes a slide that pleads, “limited exposure to sovereign debt [of] Portugal, Ireland, Greece and Spain”. Yet whatever Europe’s macroeconomic woes, there is actually a more optimistic picture emerging from its lenders. While the view of some forecasters, including the IMF, has been that European banks were sitting on a bad debt time-bomb, the evidence from fourth-quarter results is that the pace at which loans are souring has peaked.

Many of the big firms that had reported full year results by Wednesday February 17th, including BNP Paribas, showed a sequential quarterly decline in bad-debt provisions. Even for those that did not, for example Britain’s Barclays, bad-debt charges came in lower than expected. In almost all cases banks’ bosses made soothing sounds about bad debts reaching a peak in 2009. This picture even appears to extend to the dodgiest corner of banks’ loan books: eastern Europe. Bad-debt charges there remain high. But from Belgium’s KBC to the banks of Sweden and Norway, most firms active in the region hinted that the pace at which loans are turning sour is slowing, even if there is still a big stock of rubbish to clean up. If these suggestions are correct, then overall loss rates on eastern European loans will be far below the 10% or so the IMF projected during the depths of the crisis last year. …