A growing number of central and eastern European economies are struggling with high non-performing loan ratios. But bad loans do not always equate to poor profits.

Chart one Top 20 non-performing loan ratios 2012

After five unrelenting years of recession, Greek banks are dragged down with non-performing loans (NPLs). Out of the 20 banks with the highest NPLs in 2012, a quarter are from Greece, while National Bank of Greece also lurks just outside the top 20. Among the top 300 banks by NPL ratios, eight are Greek, and their aggregate NPL ratio was 23.3% based on 2012 data.

Chart two Top 20 banks by NPLs - return on assets 2012

However, there is also a profound and growing NPL problem in a number of central and eastern European (CEE) economies. Bad loans in Hungary are on the way down, but there are still nine Ukrainian banks among the top 300 and their aggregate NPL ratio is 14%. Slovenian and Romanian banks in this sample both have aggregate NPL ratios in excess of 20%, with Hungary at 19%. By contrast, the aggregate ratio in Spain, where 15 banks feature in the top 300 for NPLs, is about half this, at 9.1%. There are no Spanish banks in the top 20, although Catalunya Banc falls just outside.

The top two banks for NPLs were, at the end of 2012, both subsidiaries of Italy’s UniCredit. ATF Bank in Kazakhstan was sold to a local buyer in May 2013, and the fate of Ukrsotsbank in Ukraine must now be in doubt. UniCredit has the largest network in CEE, and across the nine subsidiaries for which data is available, the aggregate NPL rate was more than 12% in 2013. However, the consolidated rate for the group as a whole is significantly lower, at 7.6%, mainly thanks to the very healthy German business HypoVereinsbank. Raiffeisenbank International, with the second largest network in the CEE region, has an aggregate NPL ratio of less than 10% across 13 subsidiaries that feature in the top 300 NPLs.

Impairments do not always equate to a poor performance, if the business model is based around taking high risks but pricing them correctly. African markets continue to provide a good return for the risks that lenders take, and of the five banks among the top 20 NPLs that recorded profits in 2012, four are African. Of those, South Africa’s African Bank, which specialises in high-risk consumer lending at high interest rates, recorded NPLs approaching 29% in 2012. Yet it earned a return on assets of 6.3%, which places it among the top 10 banks for profitability in our 2013 Top 1000 World Banks ranking.

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