The EBA states that the situation of EU banks has improved considerably, but is still critical of the high number of NPLs, which are hampering profitability. In its update of the Risk Dashboard, which sums up the risks and weaknesses in the EU banking sector in Q4 2017, the EU authority focussed in particular on the trend in capitalisation, asset quality, profitability, and refinancing of the banking sector. In response to the recommendation by the European Systemic Risk Board (ESRB) relating to commercial real estate markets, the EBA for the first time published an additional page with aggregated real estate exposures.
The EU banks further improved their capital ratios. The CET1 quote (phase-in) rose 20 basis points in comparison with the prior quarter to 14.8% and (fully loaded) by 30 basis points to 14.6%. The Tier 1 quote increased by 20 basis points to 16.2%, and the total capital ratio by 10 basis points to 19.0%. The fall in risk-weighted assets played the main role in this.
According to the EBA, the quality of the loan portfolios also improved further. The NPL ratio fell to 4.0%, the lowest level since late 2014. The increase in credit volume and the reduction in the number of NPLs by about one third over a period of three years played a role here. The NPL volume dropped from EUR 1.12 trillion to EUR 813 billion. While there was evidence of the positive trend in all sizes of banks, the wide range in EU countries from 0.7% to 44.9%, with in some cases high NPL portfolios on banks’ balance sheets, illustrates the vulnerability of the EU banking sector as a whole. The cover ratio of the NPLs fell by 20 basis points to 44.5%.
In the view of the EBA, profitability remains a major challenge. On average the ROE dipped from 7.2% to 6.1% in the first three quarters. Year-on-year, however, the ROE improved by 2.8 percentage points compared with the low point in the fourth quarter of 2016. Trading income was the primary driving force here. Overall ROE is still lower than capital costs, with the EBA identifying problem assets, cost efficiency and the business models as obstacles to achieving sustainable profitability levels.
There was a positive trend in the refinancing and liquidity situation. Driven by an increase in customer deposits, the loan-to-deposit ratio fell still further, reaching 116.7% (-50 basis points). The liquidity coverage ratio improved to 148.5% and was above the 80% figure required for 2017.