PwC: Banks' bad loans balloon while provisioning shrinks

NON-PERFORMING loan holdings at European banks leapt between 2007 and 2010 while coverage provisioning lagged behind, according to a new report by PwC.

Its NPL barometer shows in seven major European economies, NPLs made up 2% of total lending before the crisis, compared with 5% last year. By contrast, total provisions on lending as a percentage of NPLs stood at 84%, whereas 2010 data shows coverage has retreated to 50%.

The total value of NPLs in 2007 was more than €160bn (£140bn), with the 2010 figure estimated to be above €500bn - an increase of more than 200% - while overall provisioning coverage declined by 40%.

This suggests provisions have not kept pace with burgeoning NPLs, a potentially worrying trend for those already concerned that major banks lack prudence following the introduction of International Financial Reporting Standards.

PwC partner Richard Thompson said: "We expect the rate of growth of NPLs to reduce over the next few years as the economic recovery gains momentum. However, the impact of rising interest rates and austerity measures in many countries adds a layer of uncertainty over the ability of companies and consumers to meet their debt obligations."

Some countries saw more rapid expansion of NPLs than others; Ireland led the pack, with NPLs leaping from 1% of total lending in 2007 to 20% last year, while provision coverage dropped from 60% to around 25%.

The analysis covered 75% per cent of banks in Belgium, German, Ireland, Italy, Portugal, Spain and the UK; it did not examine central banks.