13 January 2021

EBA points to a further rise in capital and leverage ratios, whereas profitability remains strongly subdued

Capital and leverage ratios increased quarter-on-quarter (QoQ); Forborne loans were further on the rise while non-performing loans declined; Share of stage 2 exposures kept on growing for loans under moratoria.

The European Banking Authority (EBA) published today its quarterly Risk Dashboard together with the results of the Risk Assessment Questionnaire (RAQ). The Q3data shows a rise in capital ratios, and an improvement in the NPL ratio, while the return on equity (RoE) remained significantly below banks’ cost of equity. The Risk Dashboard includes, for the first time, data on moratoria and public guarantee schemes.

Capital ratios continued to improve in Q3 2020. Due to a further increase in capital and contraction in risk-weighted assets, the CET1 ratio grew by 40bps to 15.1%. The leverage ratio similarly increased from 5.2% in Q2 to 5.5% in Q3 (both based on a fully phased in definition).

The non-performing loan (NPL) ratio continued its decline, from 2.9% in Q2 to 2.8% in Q3, supported by a contraction in the NPL volume and rising total loans and advances. The forborne loan ratio remained unchanged at 2% and volume of forborne loans rose by around 2.5% QoQ. The share of stage 2 loans in total loans contracted in Q3 by 20bps to 8%, whereas the share of stage 1 loans increased by 20bps. According to the RAQ results, more than 75% of banks expect a worsening in asset quality for corporate portfolios as well as consumer credit. While 60% of the banks expect their cost of risk for the current financial year will not exceed 100bps, most of the analysts estimate it will be in the range of 100-150bps.

Loans under non-expired moratoria declined from around EUR 810bn in Q2 to around EUR 587bn in Q3. The share of stage 2 loans under moratoria increased from 16.7% to 20.2% in contrast with the declining trend recorded for total loans. Loans under public guarantee schemes increased from around EUR 185bn to EUR 289bn in Q3. The coverage through public guarantees was nearly 70% for these exposures.

RoE increased from 0.5% to 2.5% in Q3. The rise was driven by the contraction of the cost of risk (74bps, down from 86bps in Q2). Total net operating income increased slightly, supported by lower losses in net trading income. The cost to income ratio declined from 66.6% to 64.7% in Q3, mainly due to a further decline in costs.

Banks indicate that extension of remote working and the strengthening of related infrastructure, including cyber-security levels, were key reactions to the COVID-19 crisis. Banks also suggest that enhanced teleworking arrangements will probably remain in place in the long-term (around 80%) and they expect increased spending on digital innovation and new technologies in order to attract new business channels (around 60% plan a significant or slight increase of respective spending).

The loan to deposit ratio further declined from 116% to 113.6% driven by strongly rising client deposits. The liquidity coverage ratio (LCR) rose to new heights, reaching 171.3% (166% in Q2). Focusing on the next 12 months, banks intend to attain more senior unsecured and senior non-preferred / holdco debt (close to 50% of respondents for both categories). A rising share of banks also intends to issue subordinated debt including AT1/T2 (around 30%).

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/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).

EBA

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