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EU Banking Sector Risk Dashboard Summary (Q4 2016)

Core Content Overview

This report provides a detailed analysis of the risk profile of the EU banking sector as of Q4 2016, focusing on key risk indicators (RIs) such as capital adequacy, credit risk, profitability, and balance sheet structure. The data is based on a sample of 198 European banks, including 40 subsidiaries, and reflects the weighted average of the indicators unless otherwise stated.

Main Risks and Vulnerabilities

Capital

• Tier 1 Capital Ratio: Continued improvement, reaching 14.2% in Q4 2016, up by 20 bps from Q3 2016. On a fully loaded basis, it was 13.6%.
• Total Capital Ratio: Also improved, showing a similar upward trend. The weighted average reached 18.5% in Q4 2016.
• Country Dispersion: Wide variation across countries, with ratios ranging from 10% to 19.9% for Tier 1 and 13% to 23.3% for Total capital.
• Risk Drivers: High NPL ratios, slow loan recovery processes, and limited secondary NPL markets.
• Risk Level: Generally low to medium, with some banks in high risk categories.

Credit Risk and Asset Quality

• NPL Ratio: Continued decline, reaching 5.1% in Q4 2016, down by 30 bps from previous quarters. Country dispersion remains wide, ranging from 1% to 46%.
• Coverage Ratio for NPLs: Improved slightly, reaching 44.6% in Q4 2016, up by 30 bps. Country dispersion ranges from 29% to 66%.
• Forbearance Ratio: Declined from 3.5% in the previous year to 3.2% in Q4 2016, indicating a positive trend in asset quality.
• NPE Ratio: Continued a downward trend, reaching 4.4% in Q4 2016. Country dispersion ranges from 1.5% to 12.4%.
• Risk Drivers: Persistent high NPL ratios, slow judicial processes, and lack of efficient secondary markets.
• Risk Level: High in some countries, medium in others, and low in a few.

Profitability

• Return on Equity (RoE): Deteriorated to 3.3% in Q4 2016, down by 2.1 p.p. from Q3 2016 and 1.2 p.p. from 2015. The weighted average dropped to 3.3%, with some countries showing negative RoE.
• Return on Assets (RoA): Declined to 0.21% in Q4 2016, down from 0.28% in 2015 and 0.34% in Q3 2016.
• Cost to Income Ratio: Increased to 65.7% in Q4 2016, up from 62.8% in the previous quarter.
• Risk Drivers: Declining net operating income, increasing costs, and structural challenges in business models.
• Risk Level: High in most countries, with a significant portion of banks in the worst bucket.

Liquidity and Funding

• Loan-to-Deposit Ratio: Continued its downward trend, reaching 118.4% in Q4 2016. Small banks had the lowest ratio at 79.5%, while large institutions had 116.3%.
• Liquidity Coverage Ratio (LCR): Reached 141.1% in Q4 2016, well above the 2016 threshold of 70%.
• Leverage Ratio: Slightly decreased to 26.3% in Q4 2016.
• Debt to Equity Ratio: Ranged from 10.2% to 63.4%, with a weighted average of 22.5% in Q4 2016.
• Risk Drivers: Increased unsecured funding, decreased secured funding, and challenges in meeting MREL requirements.
• Risk Level: High in some countries, medium in others, and low in a few.

Key Risk Indicators (RIs) Heatmap

• Traffic Light System: Indicates the level of risk (green for low, yellow for medium, red for high).
• Risk Trends:
  • Solvency: Tier 1 capital ratio showed an upward trend, with the highest risk bucket (below 12%) decreasing.
  • Credit Risk and Asset Quality: NPL ratio continued its decline, with coverage ratio showing a slight improvement.
  • Profitability: RoE showed a downward trend, with a significant increase in the number of banks in the worst bucket.
  • Balance Sheet Structure: Loan-to-deposit ratio continued its decline, with a wide dispersion among bank sizes.

Methodological Notes

• The heatmap reflects the trend of RIs based on historical data.
• The data is compiled by the European Banking Authority (EBA) since 2014 and is used for risk assessments.
• The sample of banks is reviewed annually by competent authorities and adjusted accordingly.
• The risk levels are determined by the probability of materialisation of risk factors and their likely impact on banks.

Conclusion

The EU banking sector showed improvements in capital ratios and asset quality, but profitability and liquidity remained concerns. Country dispersion was significant, with some regions experiencing higher risks. The report highlights the importance of continued monitoring and regulatory efforts to address these vulnerabilities.