European Banks Still Attracted to Risks, Rewards of Retail Lending

The excellent credit quality of European banks’ large and growing retail lending books is exposed to potentially worsening market conditions in the medium term, but is unlikely to suffer a repeat of the high loss rates that stung the sector a decade ago, according to a report by Standard & Poor’s. The report noted that the almost zero-risk mortgage lending climate brought about by a decade of falling interest rates and rising house prices is unlikely to persist indefinitely and thus leaves some banks vulnerable to a potential reversal of those favourable trends. The report surveyed the eight major retail lending markets in Europe, and identified those that are at risk of incurring the strongest correction. Overall, markets that have seen both a sharp increase in household indebtedness and a rise in house prices, such as the U.K., the Netherlands – and to a lesser extent, Spain – would have the greatest exposure in a negative scenario. Countries that are less exposed are Germany, France, and Italy, with Denmark and Sweden falling in the middle of the spectrum.

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