We update our analysis on the development of non-performing loans after the economic contraction caused by COVID-19. We published our first forecast of NPL ratios in late April shortly after most of Europe had gone into an unprecedented lockdown to fight the spread of the infection. The economic shock caused by Covid-19 is widely expected to result in a wave of new NPL and banks have reflected the expected increase in higher loan loss provisions in the first half of 2020. However, to date this wave of NPL has not materialised as a result of unprecedented support measures by governments and central banks which included payment moratoria and government-backed guarantees for new loans on an unprecedented scale. We adapt our earlier analysis from late April reflecting the revised scenarios from the IMF published in their October World Economic Outlook. The IMF scenarios were published before the stronger-than-expected Q3 data became available. We adjust our forecast model to better reflect the unusual intervention measures and the resulting expected time delay between the economic hit and the increase in NPL. The updated forecasted NPL ratios are lower than those predicted in April but are still expected to more than double in most countries over the next two years.

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