OREANDA-NEWS. EU banks are showing broadly improving asset-quality metrics, albeit with continuing divergence between the northern and southern banks, says Fitch Ratings in a report published today. The improvement primarily stems from a reduction in legacy non-performing loans at some of the EU's largest banks. While new impaired loans are still outpacing recoveries and loan quality improvement in some EU countries, most notably in Italy, the pace of deterioration is at least starting to slow even in the worst performing sectors.

Fitch expects asset quality for northern European banks to remain better than those for southern European banks for some time. Stronger, more stable economies and economic prospects are the main reason for this. Italian banks have the worst aggregated asset quality ratios among banks in the five largest EU countries and metrics continue to deteriorate. Spanish banks will remain burdened by substantial legacy problem real estate loans and foreclosed assets despite improving economic prospects.

Reduction in German and UK problem loan stock has been supported by institutional investor appetite for purchasing problem loan collateral, particularly real estate. However, several large German banks are still suffering from their pre-crisis build-up of exposure to the global shipping sector, where some segments are taking a long time to recover.

EU banks' stubbornly high impaired loan stock is partly due to various cultural and legal incentives that favour retaining loans on banks' books, working through cyclical challenges with their customers rather than seizing collateral and writing off loans more swiftly. The very slow court processes for dealing with creditor claims in France and Italy also mean that problem loans can take a long time to move off the lenders' books. Only Spanish banks among EU institutions hold significant foreclosed assets.

The quality of published asset quality data for EU banks continues to present challenges. Regulators are trying to remedy this, including the European Banking Authority which is harmonising definitions and providing an increasingly comprehensive data set in its transparency exercises, but faces a mammoth task, with strong resistance from banks.