Two in five euro zone banks still in denial about bad loans: ECB's Enria

* Two out of five banks fall short of ECB expectations

* Enria confirms payout cap to be lifted in Sept

By Francesco Canepa, Balazs Koranyi and Frank Siebelt

FRANKFURT, May 6 (Reuters) - Around 40% of euro zone banks are failing to get to grips with loans likely to go unpaid due to the pandemic, hoping for better times or seeking to "sweep problems under the carpet", the European Central Bank's top supervisor Andrea Enria told Reuters.

Since lockdowns were imposed last year, the ECB has urged banks to recognise losses and set aside sufficient cash to absorb them, offering respite from capital and liquidity requirements to help them in the process.

Enria said the majority of euro zone banks were dealing with bad debts appropriately but "two out of five" were still falling short, for example by failing to recognise early on which loans were unlikely to be repaid.

"The majority of banks are now broadly compliant with our expectations," Enria said in an interview. "Still, about two in five banks... have significant gaps in terms of what we expect."

Even as the economy slumped last year, banks in the euro zone reported a fall in the amount of bad loans on their balance sheets, helped in part by state guarantees, moratoria on payments and schemes to offload troubled assets.

But Enria said some banks were simply failing to factor into their calculations the eventual end of government support or they were reluctant to contact struggling borrowers early on to reschedule loans in arrears.

"My gut feeling is that there is a tendency to wait and see, banks say they don’t have enough information, so let’s wait a month, then maybe the recovery starts," Enria said in an interview. "But there could be banks that are really trying to sweep problems under the carpet."

The ECB has dug deep into banks' exposure to catering and accommodation providers and will next quiz them about commercial real estate and exposure to retailers most affected by closures and the shift to online sales.

After a torrid 2020, banks such as Nordic giant Nordea and Spain's BBVA reported bigger-than-expected first quarter profits thanks in part to lower or stable provisions for loans that go unpaid.

Enria, who did not name any specific lenders, urged caution however.

"It’s a bit early to relax provisions," he said. "In normal recessions banks start releasing provisions once we are close to the peak of bankruptcies. But now we haven’t even started seeing the materialisation of asset quality problems."

Declarations of bankruptcy in the euro zone fell in every quarter of last year compared to 2019 as pandemic-support measures provided breathing space.

Still, Enria acknowledged the outlook for the economy was improving and the ECB's adverse scenario, in which some 1.4 trillion euros worth of loans go unpaid, was "much less likely" now than when it was published last summer.

He reaffirmed the ECB's intention to lift in September a recommendation that caps banks' dividends and buybacks unless the economic situation was "materially deteriorating".

He confirmed banks would only be told to rebuild their capital buffers at the end of next year or even later if the full extent of bankruptcies takes longer to become apparent.

"If the materialisation starts later because the government support measures have been extended several times now, then we might have to extend our timeline," he said.

Europe's top 50 lenders put aside around $135 billion to cover expected credit losses according to estimates by S&P Global Ratings.

For the full text of the interview, click on

(Editing by Kirsten Donovan)