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EU Banking Sector Risk Dashboard Summary - Q1 2018

Core Content

This document provides an overview of the risk and vulnerability landscape in the EU banking sector as of Q1 2018, based on a sample of 190 European banks (unconsolidated). It outlines key risk indicators (RIs) across various areas, including capital adequacy, credit risk, asset quality, profitability, and balance sheet structure. The data is compiled by the European Banking Authority (EBA) and is used to support its Risk Assessment Reports.

Main Risks and Vulnerabilities

Capital Adequacy

• Tier 1 capital ratio:
  • Remained above 11% for most institutions.
  • Decreased by 50 bps in Q1 2018 to 14.4% from 14.9% in Q4 2017.
  • The fully loaded CET1 ratio also decreased by 40 bps to 14.2%.
• Total capital ratio:
  • Slightly decreased in Q1 2018.
• CET1 ratio (fully loaded):
  • Continued to show a downward trend.
• Country dispersion:
  • The weighted average CET1 ratio varied significantly across countries, with some reporting as low as 0.3%.
  • The weighted average Tier 1 capital ratio showed a range from 12% to 15%, with the lowest being in some peripheral countries.

Credit Risk and Asset Quality

• NPL ratio:
  • Continued its downward trend, reaching 3.9% in Q1 2018, the lowest level since harmonisation.
  • The amount of NPLs decreased by almost 1/3 over 3 years, from over EUR 1.12 trillion to EUR 779.2 billion.
  • Dispersed across countries, with ratios ranging from 0.8% to 45.3%.
• Coverage ratio for NPLs:
  • Improved to 46.3% in Q1 2018, up by 1.7 p.p. from the previous quarter.
• Forbearance ratio:
  • Remained stable, with an average of 29.4% in Q1 2018.
  • Some banks showed higher forbearance ratios, up to 59.5%.
• NPE ratio:
  • Increased slightly to 44.7% in Q1 2018.

Profitability

• Return on equity (ROE):
  • Increased from 6.0% in Q4 2017 to 6.8% in Q1 2018, attributed to seasonality.
  • Year-on-year, ROE slightly decreased by 50 bps.
  • The heatmap showed an improvement in ROE, with the asset share of banks having ROE above 6% increasing to 63.3%.
  • ROE ranged from 0.7% to 19.1% across countries.
• Cost to income ratio:
  • Average decreased to 10.2% in Q1 2018.
  • Some banks had ratios above 60%, indicating inefficiency.
• Profitability remains a concern, as banks have not yet increased the share of sustainable income components. Economic and political uncertainty, along with a contracted interest margin and increased cost of equity, continues to hinder profitability.

Balance Sheet Structure and Liquidity

• Loan-to-deposit ratio:
  • Remained broadly stable at 118.5%, with an increase of 100 bps from the previous quarter.
  • Mainly driven by a decrease in deposits.
• Leverage ratio (fully phased-in):
  • Decreased to 5.1% in Q1 2018 from 5.4% in Q4 2017.
• Debt to equity ratio:
  • Increased to 14.1, reversing a decreasing trend since 2016.
• Asset encumbrance ratio:
  • Increased by 80 bps to 28.7%.
• Liquidity coverage ratio (LCR):
  • Slightly decreased to 147.0% in Q1 2018.
  • Remained well above the 100% requirement for 2018.

Key Information

• Data Sources:
  • The data is based on EBA's implementing technical standards (ITS) on supervisory reporting.
  • The sample of banks is reviewed annually and adjusted accordingly.
• Risk Indicators (RIs):
  • RIs are used to assess the level and trend of risk in the banking sector.
  • The heatmap uses traffic lights (green, yellow, red) to indicate the risk level.
  • Ratios are weighted averages unless otherwise stated.
• Reporting Thresholds:
  • The name of the country is only disclosed if the number of reporting institutions is at least three.
  • Not all banks submit data for all RIs.

Summary of Trends

• Capital ratios:
  • Generally remained high, with a slight decline in Q1 2018.
• Asset quality:
  • Continued to improve, with NPL ratios at their lowest since harmonisation.
  • However, there is still a high level of NPLs in some countries.
• Profitability:
  • Improved slightly, but remains a concern due to unsustainability and external factors.
• Liquidity:
  • LCR remained above the regulatory threshold, indicating sufficient liquidity coverage.

Contributing Factors and Risk Drivers

• Capital:
  • Credit risk and market risk were the main drivers, with potential for increased cost of risk due to economic and political uncertainties.
  • High household and NFC indebtedness in some countries is a concern.
• Credit Risk and Asset Quality:
  • Market volatility and regulatory changes are significant risk drivers.
  • The build-up of concentration in certain asset classes, such as real estate and SME financing, requires monitoring.
• Profitability:
  • Unsustainable income components, economic and political uncertainty, and cost pressures are key challenges.
• Liquidity and Funding:
  • Access to funding and maturity distribution are affected by economic and political uncertainties.
  • Increased funding costs and potential repricing of risk premia could impact liquidity.

Regulatory and Market Environment

• Regulatory changes:
  • CRR/CRD amendments, MREL requirements, and Brexit-related legal uncertainties are ongoing.
• Market volatility:
  • Increased due to macroeconomic, political, and geopolitical factors.
  • Affects banks differently based on their size and location.
• Benchmark rates:
  • The replacement of Euribor and Libor poses challenges for banks.

Conclusion

The EU banking sector showed some improvements in capital ratios and asset quality, but profitability and liquidity remain key concerns. The data highlights the need for continued monitoring and adjustments in response to evolving economic and regulatory conditions.