Banks' target to reduce bad loans becomes harder to meet

Irish banks’ ability to reduce their stocks of bad loans threatens to slip further out of reach because the moving target is based on an EU average that is itself falling rapidly, new figures show.

They ramped up controversial sales of billions of euro of non-performing loans this year, including residential mortgages, after the ECB’s single supervisory mechanism (SSM) insisted lenders quickly cut their bad loans to target in line with the average bad loan ratio of 5pc across the mainstream European banks.

The latest figures from the SSM, however, show the average ratio of non-performing loans in Europe was cut to 4.4pc at the end of last June, from 4.93pc at the end of the year. It was 5.15pc this time a year ago.

For banks with the largest stocks of bad loans, it means the target is moving away from them. In Ireland, the painfully slow pace of lending growth – hampered by the lack of housing supply – also ensures bad loans remain a stubbornly large share of overall lending.

Pressure from the SSM early this year was cited by banks, including Bank of Ireland and KBC Ireland, for their decisions to change tack this year and consider loan portfolio sales rather than rely on so-called curing or restructuring of customer debt.

Permanent TSB in particular, with a non-performing loan ratio of 16pc, is under intense pressure to act quickly.

The largely State-owned bank’s chief executive, Jeremy Masding, told TDs and senators at the Oireachtas Finance Committee last month it is likely this will mean pushing ahead with a deal to shift €1.5bn of impaired but restructured mortgages off its balance sheet by the end of the year, following an earlier sale of €2.1bn of soured loans.

Selling cured loans is politically toxic. Instead, they’re likely to be rolled into an entity funded on the bond market at a remove from the bank.

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