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In Q3 2016, EU banks' ratio of common equity tier 1 (CET1) reached new highs, increasing by 50 bps to 14.1%. This effect is simultaneously explained by the growth in capital (mainly driven by higher ‘retained earnings') as well as a decrease in RWAs.
The ratio of non-performing loans (NPLs) was 5.4%, 10 bps below Q2 2016 and suggesting that supervisory efforts are bearing fruit, albeit slowly. Looking forward, the Risk Assessment Questionnaire shows that more than half of the banks plan to increase their volumes of corporate and SME financing portfolios, as well as residential mortgage and consumer loans.
Profitability remained squeezed, and the annualised return on equity (RoE) decreased to 5.4%, one percentage point (p.p.) below the third quarter last year. The RoE was still significantly below banks' Cost of Equity (CoE), which is estimated to be between 8% and 10% by nearly half of the institutions in the Risk Assessment Questionnaire. Furthermore, the cost-to-income ratio increased to 63.0%, three percentage points (p.p.) above the third quarter of the last year.
The loan-to-deposit ratio decreased to 120.1%, compared to 120.5% in the former quarter and the asset encumbrance ratio further increased to 26.5% (25.5% in the previous quarter).
EBA Interactive Dashboard - Q3 2016
Risk Assessment Questionnaire - December 2016