The European Central Bank said lenders might require higher loan loss provisioning amid missed payments and rising number of corporate defaults.
In the latest Financial Stability Review, released Wednesday, the ECB said since the global financial crisis, weak profitability prospects continue to weigh on bank valuations despite the increased resilience of euro area banks.
The bank noted that downside risks to bank profitability arise from a weaker outlook for lending volumes and signs of optimistic provisioning.
“A weaker than expected economic recovery or premature end of loan guarantees coupled with growing vulnerabilities in the non-financial private sector may entail higher loan loss provisioning needs and weigh on bank profitability,” the bank added.
Further, the central bank observed that the euro area property markets are at the risk of correction. High household indebtedness makes the housing market even more vulnerable in some countries, the ECB noted.
The bank said the strength in asset prices and renewed risk-taking make some markets increasingly susceptible to corrections.