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EU Banking Sector Risk Dashboard Summary - Q4 2013 (Data as of Q3 2013)

Core Content Overview

This document presents a risk dashboard for the EU banking sector, focusing on capital positions, credit risk, profitability, balance sheet structure, and the broader environment. It includes key risk indicators (KRIs) and a heatmap to visualize the risk levels and trends across different areas.

Main Risks and Vulnerabilities

Capital

• Capital positions: Overall capital ratios were fairly stable but declining risk-weighted assets (RWAs) contributed to higher capital ratios.
  • The weighted average Tier 1 capital ratio peaked at 12.9%.
  • The share of banks with Tier 1 ratio above 12% increased from 58% to over 75%.
  • Tier 1 ratio excluding hybrid instruments (a proxy for CT1 ratio) had a median of 11.1%, rising steadily since Q4 2011.
  • The decline in RWAs in the three months ending in September 2013 triggered these developments.
• Capital trends: Capital levels remained stable but with some downward pressure due to deleveraging.
  • The total capital ratio had a weighted average of 15.4% in Q3 2013.
  • The median of Tier 1 capital ratio excluding hybrid instruments was 11.1%.

Credit Risk and Asset Quality

• Impaired loans and past due (>90 days) loans to total loans: The weighted average remained stable, with a slight decline of 0.1 percentage points.
  • On average, 45% of gross impaired loans were covered by specific allowances.
  • The coverage ratio increased across all dispersion measures, with a weighted average of 42.7%.
  • Banks with a coverage ratio below 25% accounted for around 13% of total assets.
• Accumulated impairments on financial assets to total (gross) assets: The weighted average was 41.3%, indicating a significant portion of assets were impaired.
  • The coverage ratio of impairments to operating income was 5.5%, showing a moderate impact on earnings.
• Asset quality: The quality of loan portfolios remained a concern, with asset quality deterioration still a major challenge. The calculation of RWAs remains a key factor affecting capital ratios.

Profitability

• Return on equity (RoE): The weighted average RoE declined to 6.3%, and the median dropped by 0.7 percentage points to 5.7%.
• Profitability drivers: Low interest rates and declining lending volumes continue to affect net interest margins.
  • The median of net interest income to total operating income was 59.1%, down from 60.5% in the previous quarter.
• Cost-income ratio: The weighted average was 9.4%, indicating a relatively low cost structure.
  • The median of the cost-income ratio was 29.6%, showing a steady trend of cost reduction.

Balance Sheet Structure

• Deleveraging: Continued but at a slower pace.
  • The debt-to-equity ratio decreased from 17.5% to 17%.
  • The loan-to-deposit ratio remained stable at around 114%.
  • The share of customer deposits to total liabilities increased from 45.5% to 46%.
• Total assets: Decreased by almost 1%, contributing to a 9.8% reduction in the year ending in Q3 2013.

Funding and Liquidity

• Funding conditions: Improved significantly compared to the previous year.
  • Most banks can cover funding needs via market funding, including unsecured and new-style debt instruments.
  • There was evidence of moderate deposit inflows from both retail and corporate customers.
  • The average cost of equity decreased.
• Funding dependency: Many banks still rely heavily on central bank funding.
• Market fragmentation: Remains a concern, with uneven cost conditions and geographical disparities in funding.

Regulatory and Environmental Risks

• Regulatory environment: Improved with more clarity, but implementation challenges remain.
  • The Basel Committee's decision on the leverage ratio definition brought attention to important regulatory issues.
  • Regulatory convergence, especially on bail-in rules, is still a challenge.
• Fragmentation: Continued lack of confidence and national-only initiatives persist.
  • Cross-border interbank markets are subdued.
  • Funding conditions differ significantly between large cross-border banks and smaller banks in "peripheral" countries.
• Sovereign risk: Reduced slightly, with recent developments in sovereign spreads leading to increased confidence.
  • Concerned sovereigns benefited from falling yields, but realignment risks remain.
  • Links between banks and sovereigns are less pronounced than before.

Key Risk Indicators (KRIs)

Solvency

1. Tier 1 capital ratio:

   • Threshold: >12% [9%-12%]
   • Traffic light: ●
   • Weighted average: 12.9%
   • Median: 12.3%
   • 25th percentile: 11.1%
   • 75th percentile: 13.9%

2. Total capital ratio:

   • Threshold: >12% [9%-12%]
   • Traffic light: ●
   • Weighted average: 15.4%
   • Median: 14.6%
   • 25th percentile: 13.0%
   • 75th percentile: 17.1%

3. Tier 1 ratio (excluding hybrid instruments):

   • Threshold: >10% [5%-10%]
   • Traffic light: ●
   • Weighted average: 11.4%
   • Median: 11.1%
   • 25th percentile: 10.2%
   • 75th percentile: 13.1%

Credit Risk and Asset Quality

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

• Threshold: <5% [5%-10%]
• Traffic light: ●
• Weighted average: 6.6%
• Median: 6.5%
• 25th percentile: 2.4%
• 75th percentile: 15.7%

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

• Threshold: >50% [25%-50%]
• Traffic light: ●
• Weighted average: 42.7%
• Median: 41.7%
• 25th percentile: 24.0%
• 75th percentile: 49.8%

20. Accumulated impairments on financial assets to total (gross) assets:

• Threshold: <1% [1%-2%]
• Traffic light: ●
• Weighted average: 41.3%
• Median: 40.7%
• 25th percentile: 28.0%
• 75th percentile: 42.4%

21. Impairments on financial assets to total operating income:

• Threshold: <5% [5%-20%]
• Traffic light: ●
• Weighted average: 5.5%
• Median: 5.0%
• 25th percentile: 2.3%
• 75th percentile: 13.8%

Earnings

22. Return on equity:

• Threshold: >16% [8%-16%]
• Traffic light: ●
• Weighted average: 6.3%
• Median: 5.7%
• 25th percentile: 1.7%
• 75th percentile: 13.9%

24. Cost-to-income ratio:

• Threshold: <33% [33%-66%]
• Traffic light: ●
• Weighted average: 9.4%
• Median: 29.6%
• 25th percentile: 17.0%
• 75th percentile: 48.4%

Assets

34. Loan-to-deposit ratio:

• Threshold: <100% [100%-150%]
• Traffic light: ●
• Weighted average: 13.8%
• Median: 13.1%
• 25th percentile: 2.4%
• 75th percentile: 27.7%

45. Debt-to-equity ratio:

• Threshold: <10x [10x-20x]
• Traffic light: ●
• Weighted average: 17.0%
• Median: 13.0%
• 25th percentile: 1.3%
• 75th percentile: 24.0%

46. Off-balance sheet items to total assets:

• Threshold: <10% [10%-20%]
• Traffic light: ●
• Weighted average: 19.5%
• Median: 20.0%
• 25th percentile: 12.5%
• 75th percentile: 23.5%

Forward Trends and Risk Levels

Risk Level

• High: Indicates a significant probability of risk materialization and likely impact.
• Medium: Indicates moderate probability and impact.
• Low: Indicates low probability and impact.

Risk Trend

• ↑: Increasing
• →: Stable
• ↓: Decreasing

Key Findings

• Capital ratios have generally improved, but asset quality remains a concern.
• Profitability levels are low, with a weak RoE and declining net interest margins.
• Deleveraging is ongoing but at a slower pace.
• Funding conditions have improved, but banks still rely heavily on central bank funding.
• Regulatory and market fragmentation continue to pose challenges.
• Sovereign risk has decreased slightly, but risks of realignment remain.

Conclusion

The EU banking sector shows signs of improvement in capital positions and funding conditions, but faces ongoing challenges in asset quality, profitability, and regulatory implementation. The risk dashboard highlights the need for continued monitoring and action to address these vulnerabilities and ensure long-term stability.