European banks entered 2026 with historically low levels of non-performing loans, reflecting several years of balance sheet clean-up and improved credit management across the sector. According to recent supervisory data, the average NPL ratio across euro area banks remains below 2%, one of the lowest levels recorded in the past two decades.
Despite the overall stability, regulators and market participants are monitoring specific segments where credit quality risks are beginning to increase. Loans to small and medium-sized enterprises (SMEs) and certain sectors of commercial real estate are currently receiving particular attention.
The current environment suggests that Europe is not facing a broad-based NPL cycle similar to the post-financial crisis period. Instead, distressed opportunities are more likely to emerge in targeted sectors and jurisdictions where macroeconomic conditions or sector-specific challenges are creating pockets of credit stress.
Market implication
Selective distressed opportunities may continue to arise in SME lending and sector-specific exposures, creating potential transaction flow in the European secondary loan market.
Sources: ECB Banking Supervision, European banking supervisory data.