EBA Risk Dashboard Update Reveals Stable EU Banking Sector Capital Levels

The EBA has updated its Risk Dashboard highlighting risks and vulnerabilties in Europe’s banking sector.

The European Banking Authority (EBA) has published a periodical update of its Risk Dashboard summarising the main risks and vulnerabilities in the EU banking sector based on a set of risk indicators in Q1 2016.

The EBA has also published the results of a Risk Assessment Questionnaire for the first time, which it conducted with banks and market analysts in April and May this year.

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Increased market volatility after the results of the UK referendum indicates a significantly heightened risk outlook of EU banks.

Risks and Vulnerabilities

The Risk Dashboard reveals that EU banks’ CET1 ratios remained at comfortable levels in Q1 2016, albeit declining modestly from 13.6 percent to 13.4 percent driven by a decline in capital that was not offset by a decrease in risk weighted assets. This was largely due to the gradual transition to the full implementation of the provisions on capital laid down in the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR), along with the reduction of retained earnings.

The ratio of non-performing loans (NPLs) stood at 5.7 percent. While this is 10bps below year end 2015, suggesting that supervisory efforts are coming to fruition, it still remains too high.

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Looking forward, banks and market analysts assume a deterioration in asset quality mainly for asset finance, according to the results of the Risk Assessment Questionnaire. The results also show, 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 5.8 percent, 1.1 percentage points below the first quarter last year, although it showed an increase of 1.1 p.p. When compared with end of 2015 data.

The RoE was still significantly below banks’ Cost of Equity (CoE), which is estimated between 8 percent and 10 percent by more than half of the institutions in the Risk Assessment Questionnaire.

In contrast to the three former quarters, the loan-to-deposit ratio increased to 121.6 percent from 121.2 percent in the former quarter. The asset encumbrance ratio decreased to 25.4 percent against 25.6 percent at the end of 2015.

On the funding mix, a large majority of banks continued to show their reliance on retail deposits funding, and nearly half of them intend to increase their senior unsecured funding.

Background

The Risk Dashboard is based on a sample of 158 banks and is part of the regular risk assessment conducted by the EBA. The results of the Risk Assessment Questionnaire were published for the first time having previously been consolidated within the Risk Assessment Report.

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