30 June 2021

EBA data shows a deterioration in asset quality of the most affected sectors

CET1 ratio increased slightly and leverage ratio contracted quarter-on-quarter (QoQ); Strong rise of forborne loans, but stable forbearance ratio amid a similar rise in total loans and advances; Return on equity rose strongly QoQ, not least due to declining cost of risk.

The European Banking Authority (EBA) published today its quarterly Risk Dashboard together with the results of the spring edition of the Risk Assessment Questionnaire (RAQ). The Q1 data shows that the CET1 ratio increased slightly on a fully loaded basis. The NPL ratio improved further, except for some sectors that may have been more affected by the pandemic. Banks’ profitability improved significantly.

The CET1 ratio increased again slightly in Q1 2021. It reached 15.6% on a fully loaded basis amid a nearly parallel rise of the numerator (CET1 capital) and denominator (risk weighted assets, RWA). The latter came in parallel to an increase in total assets. The leverage ratio declined from 5.8% in Q4 2020 to 5.6% in Q1 2021 on a fully loaded basis.

The NPL ratio declined despite a slight rise in NPL volumes. It reached 2.5%, down by 10bps compared to the previous quarter. Even though the NPL ratio declined on broad average, some sectors reported an increase. The biggest rise was among accommodation and food services (further up from 8.4% to 9.0% QoQ) as well as arts, entertainment and recreation (further up from 7.2% to 7.9%). The volume of forborne loans rose by 7.6% in Q1. However, amid the even more pronounced rise of the denominator (total loans and advances) the forbearance ratio remained unchanged at 2.0%. The stage ratio 2 ratio slightly declined from 9.1% to 9.0% in Q1.

Looking forward, the RAQ results show that a comparatively high share of banks expects rather a deterioration in the asset quality of most portfolios. More than 70% of the banks expect the asset quality of SME loans to deteriorate, followed by consumer credit (around 65%) and commercial real estate (CRE) exposures (around 55%). However, asset quality expectations slightly improved for the first time since spring 2019 as the share of banks expecting a deterioration of asset quality declined slightly for nearly all portfolios.

Loans under EBA eligible moratoria declined further in Q1 2021. They reached around EUR 203bn (down from around EUR 318bn in Q4 2020). Whereas the share of stage 2 loans under moratoria remained nearly stable at 27.3%, the NPL ratio showed a significant rise from 3.3% in Q4 2020 to 3.9% in Q1 2021. For loans with expired moratoria, the stage 2 ratio reached 23.7% (20.2% in the previous quarter) and the NPL ratio was 4.5% (4.0% in in the previous quarter). The rise in loans under public guarantee schemes (PGS) slowed down, reaching around EUR 378bn in Q1, up from EUR 343bn as of year-end (YE) 2020.

Profitability improved strongly. Return on equity (RoE) rose to 7.6% in Q1 2021 from 1.9% as of YE 2020, driven by contracting cost of risk as well as rising fee & commission and trading income. The net interest margin (NIM) significantly contracted from 133bps to 124bps, ranging from 75bps up to 302bps among countries. The cost to income ratio decreased from 65.2% in Q4 2020 to 63.6% in Q1 2021. Cost of risk fell from 75bps to 53bps QoQ, showing a wide dispersion among banks. Close to 80% of the banks indicate in the RAQ that their cost of risk for the current financial year will not exceed 100bps.

The loan to deposit ratio declined further from 112.2% in Q4 to 111.0% in Q1, supported by a bigger rise in client deposits from households and NFCs than respective loans. The asset encumbrance ratio increased from 27.9% as of YE 2020 to 28.8% in Q1 2021, presumably not least due to a further rise in central bank funding (TLTRO3) during the quarter. Looking forward, banks intend to focus their funding mainly on senior non-preferred/senior issuances from the holding company (HoldCo; nearly 50%) and preferred senior unsecured debt (more than 40%) in the next 12 months. A further rising share of banks reported their intention to draw funding from central banks (up to more than 20% from 15% in autumn last year, and 0% in autumn the year before).

Close to 60% of the banks see an increase in operational risk, which is similar to previous surveys. Also, in line with their previous responses, banks consider cyber risk and data security issues as the main source for increasing operational risk (close to 90%), followed by conduct and legal risk (around 45%).

Notes to editors

The figures included in the Risk Dashboard are based on a sample of 131 banks, covering more than 80% of the EU/EEA banking sector (by total assets), at the highest level of consolidation, while country aggregates also include large subsidiaries (the list of banks can be found here). The EBA conducts semi-annual Risk Assessment Questionnaires among banks and market analysts. This Risk Assessment Questionnaire was carried out in spring 2021, in which 59 banks and 10 market analysts submitted their answers.

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