#Banks: European Banking Authority says low profitability and high levels of non-performing loans remain a concern for EU banks

The European Banking Authority (EBA) published its periodic report on the main risks and vulnerabilities in the banking sector (30 September). The update shows an increase in EU banks' capital ratios, but also show that European banks are suffering from low profitability and high level of non-performing loans (NPLs) remain a concern.

When addressing the European Parliament (26 September), EBA Chairman Andrea Enria, said: “In ten member states the ratio (of NPLs) is higher than 12%. High NPLs are a drag on already weak bank profitability, have an adverse impact on the availability of new lending for households and corporates, and may eventually generate detriment to distressed borrowers.”“

In Q2 2016, EU banks' ratio of common equity tier 1 (CET1) increased by 10bps to 13.5%, driven by a rise of capital and a slight decline of RWAs (ratios are weighted average). The ratio of non-performing loans (NPL) was 5.5%, 10bps below Q1 2016. While there has been an improvement in credit quality, legacy assets remain a concern. Overall, the coverage ratio for NPLs improved by 10bps to 43.9% (compared to the previous quarter), but with wide dispersion among countries.

The average return on equity (RoE) was 5.7%, unchanged compared to the past quarter and around one percentage point (p.p.) below the second quarter of the last year. The cost-to-income ratio stopped its increasing trend of the four preceding quarters and decreased when compared to year end 2015 (62.8% per year end 2015, 66.0% in Q1 2016 and 62.7% in Q2 2016).

Capital requirements

The EBA are closely following the discussions at the Basel Committee on Banking Supervision (BCBS) to refine the capital requirements and reduce the variability of risk-weighted assets. The EBA’s analysis confirms that the regulatory framework needs to be adjusted to enhance the reliability and comparability of the outcomes of bank internal models. Enria, has said that it is essential that the proposed changes do not excessively reduce the risk sensitivity of the regulatory framework and does not generate ‘unjustified’ increases in capital requirements. The EBA is also making efforts to support a coordinated position of European representatives at international discussions.

Background

The figures  are presented in the form of a ‘Risk Dashboard’ they are based on a sample of 156 banks, covering more than 80% of the EU banking sector (by total assets), at the highest level of consolidation, while country aggregates may also include large subsidiaries.

The Risk Dashboard is part of the regular risk assessment conducted by the EBA and complements the Risk Assessment Report.

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