European banks continued to strengthen their capital ratios in the last quarter of 2017. The CET1 ratio increased by 20 bps, from 14.6% in Q3 2017 to 14.8% in Q4 2017, reaching a new peak since Q4 2014. The increase of capital ratios was driven by a decrease of the total risk exposures amount (mostly for credit risk).
EU banks continued to improve the overall quality of their loans' portfolio. In Q4 2017, the average ratio of non-performing loans (NPL) to total loans continued its downward trend, reaching its lowest level since Q4 2014 (4.0%). This result is explained by an increase in the outstanding volume of loans granted and a decrease in the overall amount of NPLs. Nevertheless, the widespread dispersion among EU countries, along with the still high amount of NPLs in banks' balance sheet, remains a vulnerability for the European banking sector as a whole.
Profitability remains the key challenge for the EU banking sector. The average return on equity (ROE) decreased from 7.2% (Q3 2017) to 6.1% in Q4 2017, showing its usual seasonality per year-end. However, the return on equity remains below the cost of equity with legacy assets, cost-efficiency and banks' business models still being some of the main obstacles towards reaching sustainable profitability levels.
Loan-to-deposit ratio continued to decrease, reaching 116.7% with a 50 bps decline from the previous quarter, mainly driven by an increase in deposits.
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