A new analysis by PwC UK shows growth in non-performing loans of about 10% per year for the last four years (and worse before that). However, that number relies on company accounts, and may understate the problem.
One of the main improvements in the upcoming asset quality review (AQR) program and subsequent stress testing will be harmonised definitions of what is a delinquent loan. Prior exercises have relied on national definitions.
The PwC analysis is upbeat on the subject of banks trying to sell off the non performing loans, but the amounts sold don’t make up for the overall growth trend. When the ECB finally gets around to running another stress test, it is almost certain the bad loan levels will be substantially higher than they are today.
Bad news doesn’t age well. (Net present value calculation left as an exercise for the reader.) Running the AQR before moving to the stress test has just put off the bad news.