The CET1 ratio increased on a fully loaded basis by 30bps to 14.7%, recovering around half of the decline in the former quarter. The rise of the capital ratios was supported by a contraction in risk weighted assets (RWAs), which was due, among other reasons, to regulatory measures like the amendments in the SME support factor. The leverage ratio slightly contracted, from 5.2% in Q1 to 5.1%, on a fully loaded basis, driven by an increase in total assets. The declining trend of RWAs, despite a rise in total assets, indicates also that risk weights of new exposures tend to be lower, like for instance for deposits with central banks and guaranteed loans, which were key drivers for the increase of loans and advances in Q2.

Non-performing loans (NPLs) stopped their multi-year declining trend, moving slightly up in the last quarter. However, due to the increase in total loans and advances, the NPL ratio remained roughly stable. The forbearance ratio increased slightly from 1.9% in the former quarter to 2.0%. The impact of rising forborne exposures was mitigated by a nearly similar rise in total loans and advances. Cost of risk also remains elevated during this quarter. The share of stage 2 loans rose from 7% in Q1 to 8.2% in Q2. Looking forward, asset quality remains a key risk amid the unfolding Covid-19 related crisis.

Return on equity (RoE) declined further to 0.5% from 1.3% in Q1. Whereas impairments were the key driver for the contraction of profitability, also net interest income as well as fee and commission income declined. The cost to income ratio (CIR) declined significantly from 71.8% to 66.7%. Elevated impairments will presumably remain a key drag on banks' profitability, with Covid-19 impairment overlays playing a prominent role.

Revenues might also remain under pressure, driven by the prolonged low rate environment and publicly-guaranteed new lending, which is presumably granted at lower rates than similar non-guaranteed loans. A resurgence of misconduct costs is a permanent risk, not least during times of crisis. Banks might also face challenges related to restructuring costs or the need for investments in information and communication technology (ICT), amid the growing relevance of digital banking.

Notes to editors

The figures included in the Risk Dashboard are based on a sample of 147 banks, covering more than 80% of the EU 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). Stage 2 loans, as referred to above, are exposures for which the credit risk has increased significantly after their initial recognition.