he NPL (Non-Performing Loans) ratio across EU banks has generally declined since 2014, but the total stock of NPLs remains high, with some countries making slower progress than others. While the ratio has fallen by over half since 2014, the EU's economic recovery from the coronavirus crisis could impact asset quality, potentially leading to a deterioration in bank lending capacity.

Here's a more detailed look:

• Overall Decline: The aggregate NPL ratio for EU banks has shown a sustained improvement, with the European Banking Authority (EBA) reporting a recent decline to 1.88% in Q3 2024, a marginal increase from the previous quarter.
• Regional Differences: Some member states have seen significant reductions in NPL ratios, while others have made slower progress. For example, the NPL ratio in Portugal has steadily decreased since 2017, reaching 2.32% in Q4 2024 according to Statista.
• Factors Influencing NPLs: The 2008 financial crisis and the Euro Area crisis exacerbated NPLs, particularly in Southern Europe. Factors like weak governance, poor loan selection, inefficient debt recovery, and the effects of economic downturns also contribute to high NPL ratios.
• EU Action Plan: The European Commission (EC) has implemented measures through the EU Action Plan to address high NPL ratios. These include bank supervision and regulation, reforms to restructuring and insolvency frameworks, development of secondary markets for distressed assets, and fostering bank restructuring.
• Case-Specific Solutions: Some member states have benefitted from case-specific solutions for individual banks, leading to the removal of billions of euros in gross NPLs from their balance sheets.
• Ongoing Deterioration in Some Sectors: While the overall NPL ratio is low, some sectors, like the non-financial corporate sector, have seen increases in NPLs. Additionally, the real estate sector, which accounts for a large share of EU loan portfolios, has seen a marginal increase in NPL ratios in some countries.