ECB tells banks again to watch out for rise in bad loans

FRANKFURT (Reuters) -Euro zone banks should watch out for a rise in bad loans, particularly when they lend to small businesses, consumers and commercial real estate in less desirable locations, European Central Bank supervisor Sharon Donnery said on Wednesday.

The ECB has been warning about the risk of loans going unpaid since the pandemic and again when interest rates started rising in 2022, but this has so far not materialised.

Donnery noted the ratio of "non-performing loans", those that have not been paid back for three months, was at historic lows despite a slight uptick in 2024. Even early warning indicators of credit deterioration were not flashing red.

Still, she identified some vulnerable areas to which banks should pay attention, particularly in light of geopolitical and trade tensions.

"The current geopolitical environment adds a new layer of uncertainty and is a source of downside risk to the outlook," she told a financial conference in Milan.

"Rising global trade tensions and supply chain disruptions also pose risks to banks with significant exposures to export-oriented industries, such as manufacturing," she added.

Donnery said the outlook was "particularly challenging" for commercial property loans in areas that are considered "non-prime", because "environmental, social and governance risks are heavily affecting demand".

She noted early arrears on consumer credit ticked upward in the last quarter of 2024 and said banks "must prepare for the possibility of further credit quality deterioration if economic conditions worsen".

Donnery added "vigilance is crucial" when banks lend to small to medium enterprises as they would bear the brunt of an economic downturn.

(Reporting by Francesco Canepa; Editing by Joe Bavier)