• EBA data show 6.6 billion euros provision gap to EU average
  • German asset quality better than Austria due to CEE exposure

German banks would have to increase bad-debt provisions by an amount equivalent to more than a quarter of their first-half profit to bring them in line with the European average, Moody’s Investors Service said in a report published Wednesday.

Provisions for non-performing exposures amounted to 35 percent of the nominal value of the loans at the end of June, Moody’s said in the note, which is based on an analysis of data released by the European Banking Authority. To bring that to the average European level of 43 percent, 6.6 billion euros ($7.3 billion) in additional provisions would be needed, Moody’s said. That’s equal to 27 percent of German banks’ pre-provision income in the first six months of 2015.

“We believe German banks’ more balanced loan-book breakdown masks the true asset risks because around half of the loan portfolio are to credit and other financial institutions and to the public sector that typically do not default,” Moody’s analysts led by Swen Metzler said in the report. “In combination with concentration risks to stressed sectors in the corporate loan book, we consider these exposures to have high tail risks for German banks because, despite the low probability of default, there is a high loss potential if default occurs.”

Because of the structure of their loan books, German banks’ asset quality is better than that of the European average, Moody’s said. About 3.4 percent of German banks’ credit exposure, or 76 billion euros in absolute terms, is non-performing, the ratings company said. That compares to 5.6 percent in Europe overall, and 8 percent in Austria, which is more exposed to eastern Europe’s weaker asset quality.

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