Bad loan levels across Central, Eastern and Southeast Europe (CESEE) remain close to historic lows despite mounting economic and geopolitical headwinds, but early warning indicators point to rising stress in commercial real estate, small businesses and household credit, according to a new report published on December 17.

The latest Vienna Initiative NPL Monitor shows that non-performing loan (NPL) volumes in the CESEE region fell 3.5% year on year to €28bn in the second quarter of 2025, supported by “solid borrower fundamentals and active balance-sheet management”.

“The average regional NPL ratio also remained broadly stable, at 1.93%,” the report said, adding that this was down by 0.2 of a percentage point (pp) from the same quarter last year.

However, the report cautioned that headline indicators mask growing vulnerabilities beneath the surface, particularly as high interest rates, slowing growth and geopolitical uncertainty weigh on the region. 

“While the headline indicators suggest resilience, they hide more fragile dynamics beneath the surface,” the authors said. “National trends are diverging as macroeconomic pressures, sectoral exposures and policy responses vary.”

Early signs of strain

The report warned that “early signs of strain are emerging as weaker economic prospects and rising policy uncertainty begin to challenge the region’s small and open economies,” even as low unemployment and strong liquidity have helped contain new bad loans so far.

“Borrower affordability challenges continue in the current microeconomic environment, with refinancing risks persisting due to relatively high interest rates,” it said.

Across the region, credit-quality pressures remain concentrated in specific sectors. The report highlighted “stress in commercial real estate, SMEs and retail”, while also pointing to the rapid growth of private credit and its increasing links to banks as a source of “structural vulnerabilities”.

At country level, the picture is increasingly uneven. Montenegro and Serbia recorded some of the sharpest improvements, with NPL volumes falling 22.5% and 19.9% respectively in the year to June 2025.

In Poland, NPL volumes declined 9.4%, a development the report linked to easier lending standards. “Polish banks eased lending criteria in Q2 2025 – driven by stronger competition, interest rate cuts and lower NPL levels – boosting demand for loans,” it said.

By contrast, Estonia saw NPL volumes rise 14.2%, while Romania recorded a 14.3% increase “amid weak economic growth and emerging credit risks, particularly in the SME and real-estate sectors”.

The report also highlighted developments outside the core CESEE group. In Ukraine, NPL stocks fell 15.7% over the year, with the NPL ratio dropping to 27% in the second quarter of 2025, “its lowest level since March 2022, just after the start of Russia’s full-scale invasion”.

“Excluding legacy bad debts from state-owned banks and former PrivatBank owners, the decline was mainly due to robust growth in new high-quality loans and NPL write-offs,” the report said.

Greece also saw a sharp fall in bad loans, with NPL volumes down 39.2% year on year. The report said the decline was “driven by aggressive portfolio sales and the extension of the HAPS”, the state-backed securitisation scheme, which helped push NPL ratios below 4%.

Turkey moved in the opposite direction. NPL volumes there surged 56.5% in the year to June 2025, “primarily driven by consumer and credit-card exposures”.

“Softer economic activity, high funding costs and currency weakness and inflation are weighing on borrower repayment capacity and contributing to a further rise in NPL volumes,” the report said.

While asset quality has improved overall, banks’ provisioning buffers have weakened slightly. The region’s overall coverage ratio fell 1.2 percentage points year on year to 63.3% in June 2025, “mainly due to some countries’ softer provisioning buffers”.

Slovenia recorded the highest coverage ratio at 96.4%, while Czechia and Bulgaria had the lowest, at 49.9% and 50.5% respectively.

Despite this, the report said banks were better positioned than in previous cycles. “Banks’ prior provisioning efforts and stronger capital buffers should help them absorb any potential losses,” it said.

Ratings agency S&P Global expects NPL ratios across the region to rise to between 3.0% and 3.2% by the end of 2026, according to the report.

Shift in deleveraging strategies

The report also described a structural shift in how banks manage bad loans. “Despite banks having smaller NPL volumes to sell in many of the CESEE countries, deleveraging has become more embedded in banks’ annual capital and portfolio planning cycles,” it said.

“Sales decisions are now less of a one-off reactive exercise and more to do with strategic forward-planning.”

That shift is playing out differently across countries. In smaller CEE markets, “new NPLs for disposal remain limited”, making it harder to build consistent sales pipelines.

Secondary trading activity is picking up, though unevenly. “Across the region, secondary liquidity is improving, but remains uneven, although pricing remains fragmented and highly asset specific,” the report said.

One of the clearest warning signs highlighted by the report is the rise in SME problem loans. “A rise in SME problem loans has been observed in many CESEE markets,” it said, with most resolved through restructurings rather than sales.

At the same time, investors are showing greater appetite for mixed corporate–SME portfolios, particularly in Greece, Romania and the Western Balkans, “indicating growing investor appetite for this asset class”.

Technology is playing an increasingly central role in NPL servicing, particularly in Greece and Turkey. “Technology has become a key enabler of NPL servicing, processing large volumes of data and documentation efficiently while optimising operations through targeted action plans,” the report said.

The growing use of AI is expected to drive consolidation among servicers, as “smaller firms struggle to compete”.

Unpredictable outlook 

Looking ahead, the report struck a cautious tone. “The euro area is approaching 2026 with a weaker macro-financial environment amid considerable geopolitical uncertainty,” it said, noting that “the unpredictability of trade policy has risen to its highest levels in 35 years”.

The ECB Financial Stability Review has warned that “the credit risk outlook for both corporate and household portfolios remains pessimistic due to weak macro-financial conditions and persistently high interest rates”, with consumer credit particularly exposed.

“While asset quality is expected to deteriorate further,” the report concluded, “banks’ proactive collections, restructurings, NPL sales and stronger capital cushions should limit the overall impact on the NPL ratio across the CESEE region.”