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EU Banking Sector Risk Dashboard Summary (Q1 2017)

Core Content

This summary presents the key risk indicators and trends for the EU banking sector as of Q1 2017, highlighting the performance of capital ratios, credit risk, asset quality, profitability, and balance sheet structure.

Main Risks and Vulnerabilities

Capital

• Pillar 1 Risks:

  • Credit Risk: Non-performing loan (NPL) ratios remain systemically high, with structural and market impediments to NPL reduction. Banks are vulnerable to rising impairments, particularly in auto loans.
  • Market Risk: Volatility and valuation risk have cautiously reduced, but banks remain vulnerable to sudden liquidity shocks and political uncertainties.
  • Operational Risk: ICT-related risks are high due to reliance on technology and the challenges of digitalisation. Cyber attacks pose a significant threat.

• Pillar 2 Risks:

  • Concentration Risk: Low interest rate environment and a steepening yield curve may increase refinancing costs and impact banks with high NPL.
  • Reputational and Legal Risk: Misconduct-related risks and lengthy settlement processes continue to affect bank sentiment.
  • Profitability: Profitability has improved but remains below sustainable levels. High costs and structural challenges persist.

• Liquidity & Funding:

  • Access to Funding: Banks have high volumes of unsecured funding, including MREL instruments, and central bank funding. However, funding market access is vulnerable to volatility and political risks.
  • Funding Structure: Challenges in attaining required MREL volumes and a potential reduction in central bank liquidity support may affect funding costs and deposit base.

• Environment:

  • Regulatory and Legal Environment: Regulatory uncertainty persists, allowing for regulatory arbitrage.
  • Fragmentation: High fragmentation in asset quality, profitability, and cross-border interbank lending remains.
  • Sovereign Risk: Banks in some jurisdictions have significant sovereign exposure, and debt overhang continues to pose risks.

Key Risk Indicators (RIs)

1. Solvency – Tier 1 Capital Ratio

• Q1 2017: 14.1% (down 10 bps from previous quarter)
• Fully Loaded CET1 Ratio: 13.8% (up from 13.6% in year-end 2016)
• Country Dispersion: All EU member states have an average CET1 ratio above 10%, with wide dispersion.
• Size Class: Small banks have lower CET1 ratios, while large banks show more stability.

2. Total Capital Ratio

• Q1 2017: Remained broadly stable, with weighted average at 18.5%.
• Country Dispersion: Varies widely across the EU, with some countries showing significant differences.

3. CET1 Ratio

• Q1 2017: 14.1% (weighted average)
• Country Dispersion: High dispersion, with some countries below 12% and others above 15%.
• Size Class: Small banks have lower CET1 ratios, while large banks show more stability.

4. CET1 Ratio (Fully Loaded)

• Q1 2017: 13.8% (up from 13.6% in year-end 2016)
• Country Dispersion: Varies widely, with some countries below 12% and others above 15%.
• Size Class: Small banks have lower CET1 ratios, while large banks show more stability.

5. NPL Ratio

• Q1 2017: 4.8% (down 30 bps from previous quarter)
• Country Dispersion: Wide range from 1% to 46%, with some countries showing high NPL ratios.
• Trend: NPL ratio continues to decline, but structural impediments remain.

6. Coverage Ratio for NPLs

• Q1 2017: 45.2% (up from 43.7% in previous quarter)
• Country Dispersion: Wide range, with some countries showing coverage ratios below 40%.
• Trend: Coverage ratio has improved, indicating better capacity to absorb losses.

7. Forbearance Ratio for Loans

• Q1 2017: 3.0% (down from 3.5% in previous year)
• Country Dispersion: Wide range, with some countries showing forbearance ratios above 4%.
• Trend: Forbearance ratio continues to decrease, reflecting improved loan management.

8. NPE Ratio

• Q1 2017: 6.5% (weighted average)
• Country Dispersion: Varies widely, with some countries showing higher ratios.
• Trend: NPE ratio shows a slight decrease, but remains a concern for the sector.

Profitability

• Return on Equity (RoE):

  • Q1 2017: 6.9% (up from 5.6% in Q1 2016)
  • Country Dispersion: Ranges from -3% to 16%, with narrowing gaps.
  • Trend: RoE has improved but remains below long-term sustainable levels.

• Return on Assets (RoA):

  • Q1 2017: 0.44% (up from 0.21% in year-end 2016)
  • Country Dispersion: Narrowing range, with some countries showing better performance.
  • Trend: RoA has increased, indicating improved asset efficiency.

• Cost to Income Ratio:

  • Q1 2017: 63.9% (down from 65.3% in previous quarter)
  • Country Dispersion: Varies from below 50% to above 60%.
  • Trend: Cost to income ratio has improved, though administrative costs have increased.

• Net Interest Income to Total Operating Income:

  • Q1 2017: 56.2% (down from 57.8% in previous quarter)
  • Country Dispersion: Varies, with some countries showing lower shares.
  • Trend: Net interest income share has decreased, indicating a shift in income sources.

• Net Trading Income to Total Operating Income:

  • Q1 2017: 10.2% (up from 6.1% in Q4 2016)
  • Country Dispersion: Varies, with some countries showing higher shares.
  • Trend: Net trading income has increased significantly, contributing to improved profitability.

Balance Sheet Structure

• Loan-to-Deposit Ratio:

  • Q1 2017: 118.1% (down from 121.7% in Q1 2016)
  • Country Dispersion: Varies, with some countries showing higher ratios.
  • Trend: Loan-to-deposit ratio continues to decline, but at a slower pace.

• Debt to Equity Ratio:

  • Q1 2017: 12.5% (weighted average)
  • Country Dispersion: Varies, with some countries showing higher ratios.
  • Trend: Debt to equity ratio has decreased, indicating better capital structure.

• Liquidity Coverage Ratio (LCR):

  • Q1 2017: 144.9% (up from 141.1% in Q4 2016)
  • Country Dispersion: Varies, with most countries above the 80% threshold.
  • Trend: LCR has improved, reflecting better liquidity management.

Key Information

• The risk dashboard is based on a sample of 189 European banks (unconsolidated), including 36 subsidiaries.
• The data is weighted average unless otherwise stated.
• The data is based on EBA's implementing technical standards (ITS) on supervisory reporting (EU Regulation No 680/2014 and its subsequent amendments).
• The sample of banks is reviewed and adjusted annually by competent authorities.
• The heatmap provides a visual representation of risk trends, with green for "best bucket", yellow for intermediate, and red for "worst bucket".
• The data bar colour scale is used to indicate the trend of the risk indicators.