FRANKFURT, Nov 15 (Reuters) – Eurozone banks could face rising bad debt as inflation and rising interest rates impact household incomes, including the poorest among them, notes the European Central Bank (ECB) in a study published on Tuesday.
Double-digit inflation in many countries is forcing consumers to dip into their savings and this movement is likely to continue, with wage increases being much lower than price increases, especially for households with the lowest incomes, whose food and energy expenses represent a more disproportionate share of the total budget.
“The simulated impact on banks’ asset quality from the end of 2022 is marked, even based on historically low non-performing loan (NPL) levels, with an increase in the NPL ratio estimated at 80 basis points. basis”, specifies the ECB in an article in its Financial Stability Review.
The subprime loan ratio of eurozone banks stood at 2.35% at the end of the second quarter.
Italian, Portuguese, Greek and Cypriot banks are the most exposed to this risk of deterioration in the quality of loan portfolios, while French, Irish and Luxembourg banks could be among the least affected, specifies the ECB study.
The risk is very concentrated on low-income households because a 10% increase in the cost of living can translate for them into a 20% drop in purchasing power, compared to only -5% for households in the middle of the income pyramid.
The risk is therefore not of a systemic nature since the most threatened households represent only 13% of household bank debt in the euro zone, compared to 70% for households with the highest incomes, which are practically unaffected by inflation.
“The number of genuine defaults is expected to increase only slightly, but downside risks to banks’ asset quality are increasing, particularly in vulnerable countries,” the ECB said.
The rise in mortgage rates, linked to that of the ECB’s key rates, could also affect the quality of banking assets, but this movement will undoubtedly be slower, as fixed-rate loans represent a large share of the stock of loans, continues the study.
“Lower income households are the main source of defaults and the increase in NPL ratios could vary from country to country,” she adds.
(Report Balazs Koranyi, French version Marc Angrand, edited by Kate Entringer)