Supply Chain

Bad News for Banks Isn’t Good for Corporates, Either

Economists now expect nonperforming loans to hit a euro-era high of 6% of all loans.
Andrew SawersApril 11, 2012

A recent report suggests that banks’ nonperforming loans (NPLs) in the eurozone will be at the highest level since the creation of the single European currency. Although the European Central Bank’s longer-term-refinancing operation has helped to calm financial markets somewhat, the real economic background remains difficult and the regulatory environment is compounding problems. Smaller companies are expected to be worst hit, but the impact on the supply chain of larger corporates could be painful.

Data provided by research group Oxford Economics for an Ernst & Young report shows that the economists now expect NPLs to hit a euro-era high of 6% of all loans. The researchers now believe that this year will see a 0.5% contraction in the European economy as it gets trapped in a low-growth, low-investment cycle. Moreover, as banks struggle to meet new European Banking Authority capital targets later this year, Oxford Economics expects these rules to dampen banks’ risk appetites at a time when credit quality is deteriorating.

Overall, demand for new loans to businesses and consumers is expected to fall 2.3% in 2012 — equal to 211 billion euros — an even sharper decline than the 0.8% fall seen in the immediate wake of the financial crisis in 2009, in part because banks are tightening their credit standards.

Senior economist Lloyd Barton told CFO European Briefing, a CFO online newsletter, that he would expect the number of corporate insolvencies to “mirror the upward movement in nonperforming loans.” The default rate is more focused on smaller companies, but “whenever a corporate fails, there is a knock-on impact in the supply chain,” Barton said — so even cash-rich companies that are not reliant on bank financing could suffer if key suppliers or distributors fail.

Barton added that banks lack the risk appetite to restructure most corporate bad debts, so NPLs will turn into bankruptcies rather than remain on the banks’ books as problem loans. The exception might be large commercial real estate loans, which can cause serious damage to banks’ balance sheets, but “there’s always the possibility that [commercial property] prices will rise again and that makes banks more in favor of restructuring loans.”

The retail sector is expected to be hardest hit, with the so-called peripheral economies — those that are making most of the headlines in the continuing eurozone sovereign debt crisis — being the worst-affected countries. Germany is expected to see a small increase in lending to businesses of around 1.4%, while France and the Netherlands could see a small contraction on the order of 1.6% and 1.1%, respectively. But Italy is forecast to see a 4.7% fall in corporate lending, while the decline in Spain could be as much as 12.1%.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.

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