EBA updated Risk Dashboard shows significant improvements across EU banks but elevated NPLs are still the main challenge for their profitability

05 April 2018

The European Banking Authority (EBA) published today the regular update of its Risk Dashboard summarising the main risks and vulnerabilities in the EU banking sector for Q4 2017. The progress is positive for European banks, but risks remain heightened on sustainable profitability. Following the ESRB recommendation on commercial real estate markets, the EBA's Risk Dashboard has an additional page showing the aggregated real estate exposures referred to real estate activities and the construction sector.
 
European banks continued to strengthen their capital ratios in the last quarter of 2017. The CET1 ratio increased by 20 bps, from 14.6% in Q3 2017 to 14.8% in Q4 2017, reaching a new peak since Q4 2014. CET1 ratios are now above 11% for all institutions in the sample. The increase of capital ratios was driven by a decrease of the total risk exposures amount (mostly for credit risk).
 
EU banks continued to improve the overall quality of their loans' portfolio. In Q4 2017, the average ratio of non-performing loans (NPL) to total loans continued its downward trend, reaching its lowest level since Q4 2014 (4.0%). This result is explained by an increase in the outstanding volume of loans granted and a decrease in the overall amount of NPLs by over 1/3 in 3 years, from over 1.12 trillion Euros to 813 billion Euros. Nevertheless, the widespread dispersion among EU countries (with ratios ranging from 0.7% to 44.9%), along with the still high amount of NPLs in banks' balance sheet, remains a vulnerability for the European banking sector as a whole. 
 
Profitability remains the key challenge for the EU banking sector. The average return on equity (ROE) decreased from 7.2% (Q3 2017) to 6.1% in Q4 2017, showing its usual seasonality per year-end. On a year-on-year comparison, the average ROE rose by 2.8 p.p. from its lowest level of 3.3% in Q4 2016, mainly driven by the annual increase in net trading income (8.5% in Q4 2017). However, the return on equity remains below the cost of equity with legacy assets, cost-efficiency and banks' business models still being some of the main obstacles towards reaching sustainable profitability levels.
 
Loan-to-deposit ratio continued to decrease, reaching 116.7% with a 50 bps decline from the previous quarter, mainly driven by an increase in deposits. The leverage ratio remained broadly stable, increasing by 10 bps to 5.5%.

Notes to editors

The figures included in the Risk Dashboard are based on a sample of 149 banks, covering approximately 90% of the EU banking sector (by total assets), at the highest level of consolidation, while country aggregates may also include large subsidiaries. The EBA's Decision (EBA/DC/2015/130) and respective list of banks can be found here.

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