Financial Stability Note: A profile of non-performing Irish SME loans

• 11.1 per cent of Irish SME loan balances at the country’s three main small business lenders were non-performing in December 2018, down from 17.5 per cent in June 2018.
• Key drivers of this decrease include the clearing of arrears by borrowers and improvement in the expected repayment capacity of borrowers into the future.
• The NPL ratio of Ireland’s retail banks is down substantially from its crisis peak, but remains one of the highest in Europe.

A Financial Stability Note (PDF 2.75MB) written by Niall McGeever and published today uses loan-level data from three major Irish banks to examine their progress in resolving the non-performing loans (NPLs) of Irish SMEs.

The research highlights the recent progress of Irish retail banks in resolving SME NPLs and provides a breakdown of NPL balances by loan and borrower characteristics. This includes information on loan arrears, forbearance, and sectoral breakdowns. The note also examines the relationship between current NPL ratios and recent developments in economic conditions at the level of counties and sectors. These results show that NPL ratios are best suited for analysing the health of bank portfolios, not economic conditions in a particular sector or region. The research also reports aggregate supervisory data that suggest that the Irish SME NPL ratio continued to fall in the first half of 2019.

The key findings of the Financial Stability Note are:

• 11.1 per cent of Irish SME loan balances at the country’s three main small business lenders were non-performing in December 2018, down from 17.5 per cent in June 2018.
• Key drivers of this decrease include the clearing of arrears by borrowers and improvement in the expected repayment capacity of borrowers into the future.
• 4.5 per cent of Irish SME balances have been in arrears for over two years and some loans have been in arrears for up to ten years. 3.9 per cent of balances are non-performing under supervisory definitions, but are not in arrears.
• Borrowers in the Accommodation & Food, Agriculture, Forestry & Fishing, and Wholesale & Retail sectors account for 65 per cent of NPL balances.
• NPL ratios are not a reliable guide to economic conditions in a particular county or sector. The NPL ratio within a given segment of the economy can become divorced from current economic conditions due to company liquidations, court proceedings, loan restructuring, loan sales and new lending. NPL ratios are best suited for analysing the health of bank portfolios, not economic conditions in a particular sector or region.
• Aggregate supervisory data suggest that the Irish SME NPL ratio continued to fall in the first half of 2019.