02 December 2016

EBA sees high NPL levels and low profitability as the main risks for EU banks

The strengthening of European banks' solvency, initiated in 2011, has continued. The common equity tier 1 (CET1) ratio, computed on a transitional basis, increased by 80bp between June 2015 and June 2016, to 13.6 %, based on European Banking Authority‘s (EBA) report. The fully loaded CET1 ratio was 12.1 % in June 2015 and 13.2 % in June this year. The continuous increase in common equity is the main driver for the improvement in banks' capital position. Supervisory restrictions on dividends have also boosted retained earnings, despite the low profitability environment.

The NPL ratio decreased to 5.4% in the second half of 2016 from 6.5% at the end of 2014. While there are signs of potential improvements, asset quality is still weak compared to historical figures and other regions. Material differences persist in asset quality across countries, with more than one third of EU jurisdictions showing NPL ratios above 10%. Further gradual improvements in asset quality are expected by banks and market analysts, but they will strongly depend on how successfully the impediments of NPL resolution will be addressed. Action on NPLs is needed, including supervisory actions, structural reforms and development of secondary markets.

EU banks reported an average return on equity (RoE) of 5.7% as of June 2016, down by more than 100 basis points (bp) compared to June 2015, albeit it has improved compared to 2015 and 2014 end-of-year data. The decline in profitability was driven by a drop of total operating income by 8.8%. Profitability remains a source of concern in the EU banking system which is confirmed by the fact that the RoE remains below banks' cost of equity (CoE).

Information and communication technology related risks are increasing whilst litigation and conduct risk-related concerns remain. Cyber-attacks are on the rise and banks are struggling to demonstrate their ability to cope.

Whilst funding costs have been kept low by accommodative monetary policy stances, including central banks' asset purchase programmes, overall issuances of unsecured debt were reduced in the first three quarters of 2016 compared to 2015. Volume reductions in the issuance of subordinated debt were particularly pronounced. Going forward, banks will also have to take into account in their funding plans the need to meet the global standard on total loss absorbing capacity (TLAC) and the bank recovery and resolution Directive (BRRD).

Press release

Risk Assessment Report

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