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In the first quarter of 2017, EU banks' common equity tier 1 (CET1) ratio remained high, albeit a modest decrease of 10 basis points (bps) to 14.1% was observed. This effect was mainly driven by an increase in risk-weighted assets, which is partially offset by an increase of capital ("other reserves").
The ratio of non-performing loans (NPLs) maintained a modest downward trend, decreasing by 30bps to 4.8%, and suggesting that supervisory efforts are bearing fruit, albeit slowly. Looking forward, the Risk Assessment Questionnaire shows that more than 50% of the banks expect a stable level of impairment provisions in the next 12 to 18 months, while almost 30% expect impairment provisions to decrease. Banks and market analysts also expect increases in the quality and volumes of lending, to small and medium-sized enterprises and residential mortgages.
The annualised return on equity (ROE) increased by 3.5 percentage points (p.p.) to 6.8% from a low point of 3.1% in the last quarter of 2016. The higher returns contributed to an improvement of the cost to income ratio, which stood at 63.9%. The Risk Assessment Questionnaire reflects an optimistic view of banks, as well as market analysts, for the sector's profitability. Around 80% of the banks and the market analysts "agree" and "somewhat agree" that overall profitability will improve. However, and notwithstanding recent improvements, the ROE remains, on average, below the cost of equity (COE).
The loan-to-deposit ratio decreased to 118.1%, compared to 121.7% in Q1 2016 and the asset encumbrance ratio increased to 27.7% (it stood at 25.4% in the previous year). The average liquidity coverage ratio (LCR) was 144.9% in December 2016, well above the threshold defined as the liquidity coverage requirement for 2017 (80%).
Risk Assessment Questionnaire - June 2017