Asset quality in Greece deteriorated sharply, while remaining weak in Spain, Ireland and Slovenia. By contrast, non-performing loans are falling steadily in the US.

Highest disclosed non-performing loans, Weighted average non-performing loan ratios

Non-performing loan (NPL) ratios say as much about honesty as they do about asset quality. Banks in the most troubled jurisdictions are often the most coy about disclosing NPL numbers, and the long-standing question-marks over Chinese asset quality also show that there are many ways to keep bad loans off the reported balance sheet. However, about two-thirds of banks in the Top 1000 have reported NPL numbers, and the banks with the poorest asset quality are generally in markets whose challenges are well known.

In 2011, the massive losses at Greek banks were mainly due to the restructuring of sovereign debt, and only one bank, Attica, featured among the top 25 highest NPL ratios. However, four consecutive years of recession have taken their toll on loan assets as well, and NPL ratios at the top four Greek banks doubled in this year’s ranking, pushing all four into the top 25.

Spain, Ireland and Slovenia were already prominent on the list in the 2012 ranking, and NPL ratios have risen in all three cases, with one new bank each from Spain and Ireland joining the top 25. Spain accounts for six of the top 10 largest losses in terms of pre-tax profits in this year’s ranking, and seven of the worst losses on capital. Both of these categories are filled entirely with western European banks. Despite this poor performance, overall NPLs in western Europe are not that much higher than in North America, suggesting very strong asset quality in Europe away from the crisis.

The improvement in US asset quality is striking – last year there were four US and two Puerto Rican banks among the top 25 highest NPLs. This year, one Puerto Rican bank remains, together with Dickinson Financial Corporation, which had the highest level of NPLs last year and has now almost halved its NPL ratio.

By contrast, several emerging markets are struggling with persistent NPL problems, most notably Iran and Kazakhstan. Bank Sepah, which had the highest NPL ratio in Iran in last year’s ranking, did not disclose its bad loans figure for this year’s ranking. Iran also remains a strikingly under-capitalised banking market, with three of the weakest 10 Basel capital adequacy ratios.

The Kazakh authorities have long mooted creating a ‘bad bank’ to remove troubled loans, a route already taken in Spain and now being adopted in Slovenia. The Austrian authorities are also asking the same question over Hypo Alpe Adria, which was nationalised at the end of 2009 following problems with fraud and related party lending. As a forensic examination of the bank’s balance sheet proceeds, its NPLs more than doubled in this year’s ranking.

Lowest BIS total capital ratios, worst profit performance, lowest return on capital, lowest capital-to-assets ratios


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