Fitch: Banks in Cyprus, Greece and Portugal may need further reserve build-up

Banks in Cyprus, Greece and Portugal may need further reserve build-up, where coverage is not much above the EU average (44.5%), despite riskier market characteristics, says Fitch rating in a report on Thursday.

Lower coverage levels for banks in northern Europe should suffice, given the strong collateral, with easier foreclosure and more liquid real estate markets, but further reserve build-up may be needed in Cyprus, Greece and Portugal, where coverage is not much above the EU average (44.5%), despite riskier market characteristics, says Fitch in its report with title EU Bank Asset Quality Improves; North/South Split Remains.

According to the report asset quality at EU banks is likely to continue improving in 2018 and 2019, helped by economic growth, but non-performing loans (NPLs) are still much higher in southern Europe than most of northern Europe and banks that do not reduce legacy stocks substantially while economic tailwinds prevail may come under pressure when the economic cycle turns.

Banks asset quality is improving throughout the EU, spurred by economic growth and initiatives to reduce NPL stocks. Fitch forecasts continued GDP growth in 2018 and 2019, which should translate into continued benign asset-quality scenarios for most northern European banks and help banks that still have high NPLs – mostly in southern Europe, central and eastern Europe, and Ireland – to further reduce these, says the report.

It also notes that average NPL/total loan ratios at the EUs largest banks had declined to 4% by end-2017 from 6.5% at end-2014, according to the European Banking Authority (EBA), but varied dramatically by country, ranging from 0.7% in Luxembourg to 44.9% in Greece.

A north/south divide persists and we expect the gap to continue for some time.

The country with the largest NPL stock is Italy, accounting for 23% of the EUR813.1 billion on the EBAs end-2017 Risk Dashboard, which covers 190 banks.

Source: Cyprus News Agency