09 December 2021

EBA risk assessment shows improvements in EU banks solvency, profitability and liquidity, but asset price corrections remain a key threat

Bank capital and liquidity positions have improved year on year, the CET1 ratio (fully loaded) reached 15.5%, the liquidity coverage ratio (LCR) 174.5%; Profitability has also improved, banks’ return on equity (RoE) reached 7.4% in Q2 2021. However, structural challenges for profitability remain.

• Fiscal and regulatory support measures have prevented asset quality deterioration but have also made it more difficult for banks to assess borrower creditworthiness.
• Uncertainty on the economic outlook could trigger repricing of risks.
• Increasing operational risks, mainly due to IT and cyber risks, require banks to further prioritise IT and cyber security.

The European Banking Authority (EBA) published today its annual risk assessment of the European banking system. The report is accompanied by the publication of the 2021 EU-wide transparency exercise, which provides detailed information, in a comparable and accessible format, for 120 banks across 25 EEA / EU countries. Fears about potential asset quality deterioration have not materialised, except for the sectors most affected by the pandemic. Looking ahead, banks as well as micro and macro prudential authorities need to be prepared in case of a deterioration in the economic outlook or in case inflationary pressure translates into further rising rates.

Overview of key figures

	CET1 ratio (transitional)	CET1 ratio (fully loaded)	Liquidity coverage ratio	NPL ratio	Share of Stage 2 loans	RoE	Leverage ratio (fully phased-in)
Q2 2021	15.8%	15.5%	174.5%	2.3%	8.8%	7.4%	5.7%
Q2 2020	15.0%	14.7%	166.2%	2.9%	8.2%	0.4%	5.1%

 

Banks’ capital and liquidity positions have further improved. The average Common Equity Tier 1 (CET1) ratio has increased on the back of strong results in the first half of 2021. The positive mood in funding markets and the availability of central bank funding has allowed banks to maintain comfortable liquidity positions. Banks’ net stable funding ratio (NSFR) reached on average of 130%, but analysis in the report shows that it would be significantly lower if central bank funding was excluded from the numerator. Although supervisory recommendations on capital distribution have expired, banks should not pursue overly generous dividend and share buy-back policies. Amidst increasing rate volatility, banks should carefully evaluate the risk profile of their funding plans and ensure they are able to substitute current central bank funding with other sources of funding.

Asset quality has improved overall but concerns remain for loans to specific sectors and those that have benefited from support measures. The non-performing loan (NPL) ratio has further decreased to 2.3% this year supported by several large NPL securitisations. However, the NPL ratio of the exposures to the sectors most affected by the pandemic is on an upward trend. The asset quality of loans under public guarantee schemes and under moratoria is a source of concern as an increasing share of these loans are being classified under stage 2 or as NPL. Accelerating house price increases along with banks’ recent focus on mortgage lending may become a source of vulnerability going forward.

Operational risk losses have increased during the pandemic. The growing usage of and reliance on technology has been accompanied by a rising number and impact of information and communication technologies and security-related incidents.

Lower impairment costs have increased profitability, but structural challenges remain. Banks’ net operating income has not recovered to pre-pandemic levels. The low and negative interest rate environment is still weighing on lending margins. This adds to high competition not only among banks, but also with FinTech and BigTech companies. Despite the acceleration in branch closures during the pandemic, operating expenses have stabilised in the past year as pre-existing working arrangements have gradually resumed.

Banks have made some progress related to environmental, social and governance (ESG) risk considerations. The share of ESG bonds of total bank issuances has increased in recent years, reaching around 20% of banks’ total placements this year. Banks have started integrating ESG risk considerations into their risk management. However, there is significant progress to be made, including in areas such as data, business strategies, governance arrangements, risk assessments and monitoring.

EBA

© EBA