30 September 2016

EBA updated Risk Dashboard shows that low profitability and the high level of NPLs remain a concern for EU banks

European Banking Authority (EBA) report shows that EU banks’ capital ratios have slightly increased. The CET1 ratio increased by 10 bps to 13.5% in Q2 2016, when compared to the previous quarter. This effect is jointly explained by the growth in the capital (mainly driven by higher ‘retained earnings’) as well as the slight decrease of RWAs, primarily its market risk components. On a fully loaded basis, the CET1 ratio was 13.0% in Q2 2016, increasing by 10 bps when compared to the previous quarter. Tier 1 and total capital have shown a similar trend. 

The quality of banks’ loan portfolios modestly improved in Q2 2016 but remains a concern. The ratio of nonperforming loans (NPL) kept the trend experienced in the last quarters, by decreasing 10bps, to 5.5% in Q2 2016. The dispersion among countries is still broad, ranging from about 1% to nearly 50%. Despite the recent decrease, the smaller banks’ NPL was higher(24.0%), when compared to medium-sized (11.6%) and larger banks (4.0%).

The coverage ratio for NPLs showed a modest improvement too, with a slight increase of 10bps to 43.9% in Q2 2016. Both numerator and denominator continued to decrease during the second quarter. However, the dispersion is still wide among countries (between 28% and over 66%), but again further narrowed among banks of different size classes (ranging from 43% to 45 %).  

Profitability remained at a low level. The annualised return on equity (RoE) in Q2 was 5.7%, unchanged compared to the former quarter and around one percentage point (p.p.) below the second quarter of last year. The dispersion among countries further widened (ranging from about ‐16% to 19% now). The cost‐to‐income ratio stopped its increasing trend of the four former quarters and even decreased when compared to year end 2015 (62.8% per year end 2015, 66.0% in Q1 2016 and 62.7% in Q2 2016).

The net interest margin kept its downwards trend, recorded in the last quarters, decreasing from 1.50% (Q1 2016) to 1.49% in Q2 2016. Whereas the dispersion among large and medium sized banks is narrow (1.48% for large banks, 1.51% for medium sized banks), the net interest margin remains higher for small banks (2.31%). Similarly, net interest income further decreased as a share of total operating income in Q2 2016 from 58.8% in the former quarter to 57.0% in Q2 2016. It was jointly explained by an increase in the net operating income (denominator) and, to a lesser extent, a decrease in the net interest income (numerator). Driven by the same effect, the share of net fee and commission income decreased (down by 50bp to 26.6%). The proportion of net trading result in total operating income increased between Q1 2016 and Q2 2016 from 5.1% to 5.5%, but remained lower than per year end 2015 (5.9%).

The loan‐to‐deposit ratio slightly decreased. It was 120.5% in Q2 2016, which compares to 121.6% in the former quarter. Respectively, the ratio has declined in all banks sizes’ classes, being lower for small banks (83.3%) and higher for mid‐sized institutions (137.8% and 118.0% for large banks). Liquidity indicators remained stable, with the ratio of ‘liquid assets to short term liabilities’ slightly decreasing from 21.4% to 21.2% and the proportion of ‘liquid assets to total items requiring stable funding’ remaining at 15.2% in Q2 2016.The asset encumbrance ratio slightly increased to 25.5% in Q2 2016 (25.4% in the last quarter), influenced by the funding mix (secured vs. unsecured funding, including deposits) as well as the level of central bank funding.

Press release

Dashboard

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