31 March 2021
The European Banking Authority (EBA) published today its Risk Dashboard for the last quarter of 2020. The data show a rise in capital ratios, a contraction of the NPL ratio and a return on equity (RoE) significantly below banks’ cost of equity. Besides asset quality and profitability, operational risks remain a key concern going forward.
Capital ratios continued to improve in Q4, driven by an increase in capital, which more than offset a slight rise in risk weighted assets. The CET1 ratio reached a new all-time high of 15.5% on a fully loaded basis, up by 40bps QoQ. The leverage ratio (on a fully loaded basis) increased to 5.8% from 5.5% in the previous quarter. This was supported by growing capital, but also a decline in total assets.
The NPL ratio decreased by 20bps to 2.6%. The decline was due to a contraction in NPLs, which exceeded the decrease in loans and advances. NPL ratios declined for both households and non-financial corporates (NFCs). While the NPL ratio improved for most economic sectors it increased for accommodation and food services (up from 7.8% to 8.5% QoQ) and arts, entertainment and recreation (up from 6.7% to 7.3%). The share of stage 2 loans reached 9.1% in Q4, showing a 110bps increase QoQ.
Loans under EBA eligible moratoria nearly halved in Q4. They declined from around EUR 590bn in Q3 to around EUR 320bn in Q4. The decline was more pronounced for NFC exposures than for loans to households. The share of stage 2 loans under moratoria (26.4%) is above that for loans under expired moratoria (20.1%) and nearly three times the ratio for total loans (9.1%). This might indicate that loans, which are still under moratoria, might be those with higher risks looking forward. Loans under public guarantee schemes (PGS) reached about EUR 340bn, up from around EUR 290bn in Q3. Whereas for PGS loans the share of stage 2 loans (11.7%) was above the overall average of 9.1%, the NPL ratio (1.1%) was less than half of the overall average (2.6%).
Profitability remained strongly subdued. RoE declined from 2.5% in Q3 to 2% in Q4. The rise in net fee and commission income could not compensate for the decline in net interest income. The latter was due to the contraction in interest bearing assets, amid a flat net interest margin. Cost of risk remained high and nearly unchanged at 75bps, but with high dispersion, indicating different situations among individual banks. The cost to income ratio rose by 40bps to 65.1% in Q4.
Pressure on profitability is expected to remain persistently high. The deterioration of asset quality and uncertainty on the recovery might keep the cost of risk elevated, while strong competition continues to add pressure on net interest margins and fee income. In the short-term, the repricing of wholesale funding might be faster than that of the asset side, hence, adding pressure on margins. Banks will need to streamline their operational structure not least because their clients are increasingly using digital channels.
Banks’ liquidity position further improved. The liquidity coverage ratio (LCR) reached 173.1% in Q4 (171.2% in Q3). The loan to deposit ratio declined from 113.6% in Q3 2020 to 112.2% in Q4, supported by a rise in client deposits from households and NFCs. The asset encumbrance ratio remained unchanged at 27.9%.
Phishing attempts and other types of cyber-attacks are becoming more common. The increase in remote customer on boarding and a rising participation in virtual currency transactions may expose banks to additional money laundering (ML) / terrorist financing (TF) risks. Risks of new types of misconduct and of potentially fraudulent activities related to COVID-19 support measures have not abated.
The figures included in the Risk Dashboard are based on a sample of 130 banks, covering more than 80% of the EU/EEA banking sector (by total assets), at the highest level of consolidation, while country aggregates also include large subsidiaries (the list of banks can be found here).