EBA欧洲银行-EBA-Dashboard-Q1-2014_26页_4mb

EU Banking Sector Risk Dashboard - Q1 2014 (Data as of Q4 2013)

Summary

The EU banking sector showed some improvements in capital ratios due to a decline in risk-weighted assets (RWAs), but this was offset by a decrease in Tier 1 capital due to balance sheet clean-up and legal charges. The Tier 1 capital ratio increased to 13.1%, while the Tier 1 ratio excluding hybrid instruments (a proxy for CT1) reached 11.6%. However, the decline in capital positions was outpaced by the reduction in RWAs, contributing to higher capital ratios.

The quality of loan portfolios deteriorated further in Q4 2013, with the ratio of impaired loans and past due (>90 days) loans to total loans peaking at 6.8%. This increase was primarily due to a shrinking denominator, as the actual amount of impaired loans remained relatively stable. Banks with a coverage ratio below 25% accounted for 13% of total assets, while those with a coverage ratio above 50% represented 49% of total assets. Asset quality remains a major challenge, and transparency is essential for accurate assessments.

Profitability levels remained subdued, with the annual profit flow declining by 58% (EUR 54 billion) and the Return on Equity (RoE) weighted average dropping to 2.7%, a decrease of 3.6 percentage points. The decline was driven by the cleanup of major banks, litigation costs, and reduced interest income due to low interest rates. The cost-to-income ratio averaged around 63%, and the share of banks with RoE below 8% remained stable at 75%.

The balance sheet structure continued to shift, with the debt-to-equity ratio falling to 16.5, the lowest in four years. The loan-to-deposit ratio also declined to 112.8%, indicating a reduction in leverage. However, the reliance on public funding remains high, and there is a trend towards increased deposit dependence.

Main Risks and Vulnerabilities

Capital

• Pillar 1:
  • Credit risk: Asset quality remains a major concern, with the calculation of RWAs still a challenge.
  • Market risk: Increased volatility and uncertainty in emerging markets due to geopolitical tensions.
  • Operational risk: Cost-cutting efforts may affect internal controls and increase execution risks, including fraud and cyber-risks.
• Pillar 2:
  • Concentration risk, IRRBB and other: Low interest rates help maintain asset quality but affect profitability.
  • Reputational and legal risk: Past business practices and legal redress costs continue to affect confidence and profitability.
  • Profitability: Non-performing loans may still rise, and legal and redress costs persist.

Liquidity & Funding

• Access to funding and maturity distribution: Market confidence is improving, and unsecured funding markets are recovering, though public funding remains a key source.
• Funding structure: Geographical fragmentation and retrenchment to home markets are ongoing concerns, with a trend towards improving conditions due to business model changes and macroeconomic recovery.

Environment

• Regulatory environment: Regulatory clarity has improved, but execution risks remain, especially with the implementation of "bail-in" rules.
• Fragmentation: Continued lack of confidence and national regulatory initiatives are affecting cross-border activities.
• Sovereign risk: Sovereign yields are at historical lows, but risks of re-alignment persist. Banks and sovereigns are still linked, though less intensely.

Key Risk Indicators (KRIs)

Solvency

1. Tier 1 capital ratio
   • Weighted average: 13.1%
   • Median: 12.8%
   • Trends: Increased from 10.2% in Dec 2009 to 13.1% in Dec 2013.
2. Total capital ratio
   • Weighted average: 15.7%
   • Median: 14.8%
   • Trends: Increased from 13.0% in Dec 2009 to 15.7% in Dec 2013.
3. Tier 1 ratio (excluding hybrid instruments)
   • Weighted average: 11.6%
   • Median: 11.4%
   • Trends: Increased from 9.0% in Dec 2009 to 11.6% in Dec 2013.

Credit Risk & Asset Quality

13. Impaired loans and Past due (>90 days) loans to total loans

• Weighted average: 6.8%
• Median: 6.5%
• Trends: Increased from 5.1% in Dec 2009 to 6.8% in Dec 2013.

14. Coverage ratio (specific allowances for loans to total gross impaired loans)

• Weighted average: 13.7%
• Median: 12.9%
• Trends: Increased from 41.6% in Dec 2009 to 13.7% in Dec 2013.

Profitability

22. Return on equity (RoE)

• Weighted average: 2.7%
• Median: 1.1%
• Trends: Decreased from 16% in Dec 2009 to 2.7% in Dec 2013.

24. Cost-to-income ratio

• Weighted average: 63.1%
• Median: 29.6%
• Trends: Increased from 33% in Dec 2009 to 63.1% in Dec 2013.

Balance Sheet Structure

34. Loan-to-deposit ratio

• Weighted average: 13.4%
• Median: 12.8%
• Trends: Increased from 3.1% in Dec 2009 to 13.4% in Dec 2013.

45. Debt-to-equity ratio

• Weighted average: 16.5
• Median: 14.8
• Trends: Decreased from 17 in Dec 2009 to 16.5 in Dec 2013.

46. Off-balance sheet items to total assets

• Weighted average: 19.5%
• Median: 19.5%
• Trends: Increased from 10.1% in Dec 2009 to 19.5% in Dec 2013.

Key Takeaways

• Capital ratios improved due to declining RWAs, but the actual capital positions decreased due to balance sheet clean-up and legal charges.
• Asset quality remained a major challenge, with a peak in the ratio of impaired loans and past due loans to total loans.
• Profitability was severely affected by the cleanup of major banks, litigation costs, and low interest margins.
• Balance sheet structure shifted, with lower debt-to-equity and loan-to-deposit ratios, but reliance on public funding persists.
• Regulatory and market fragmentation continue to be significant risks, especially for cross-border banks.
• Sovereign risk remains low but with potential for re-alignment due to fiscal policies and budget imbalances.

Forward Trends

• Capital: Expected to remain stable with potential for improvement if RWAs continue to decline.
• Asset quality: Continued deterioration is a concern, especially in the context of uneven economic recovery.
• Profitability: Expected to remain subdued due to ongoing challenges with non-performing loans, margins, and redress costs.
• Liquidity and funding: Expected to improve with increased market confidence and reduced reliance on public funding.
• Regulatory environment: Expected to see continued clarity, though execution risks remain, especially with bail-in rules.
• Fragmentation: Expected to persist, with banks continuing to focus on home markets and regulatory differences affecting cross-border activities.