Updated EBA Risk Dashboard shows sustained improvements in the management of NPLs across the EU but banks profitability remains a key challenge

The European Banking Authority (EBA) published today the periodical update to its Risk Dashboard, which summarises the main risks and vulnerabilities in the EU banking sector using quantitative risk indicators. In the second quarter (Q2) of 2018, the updated Dashboard identified ongoing improvements in the repair of the EU banking sector but also residual risks in banks' profitability.

European Banks' capital ratios remain high, in line with first quarter of 2018. The CET1 ratio remained at 14.5%, with a slight increase in the value of CET1 capital, accompanied by an increase in total risk exposures. CET1 ratios remained above 12% for all countries in the sample.  Compared to the previous period, the fully loaded CET1 ratio stood stable at 14.3%.

EU banks continue to improve overall quality of their loans' portfolio. In Q2 2018, the ratio of non-performing loans (NPLs) to total loans kept the downward trend and achieved a level of 3.6%, the lowest since the NPL definition was harmonised across European countries. Compared to the previous period, despite a slight decrease in the total value of the loans granted, the further decrease of NPLs (now 731 billion euros) allowed to keep the NPL downward trend. This trend is observed for all bank-size classes, but dispersion remains across EU countries (ratios between 0.66% and 44.6%). The coverage ratio is 46% in Q2 of 2018, compared to 46.5% in Q1 of 2018.

Profitability remains a concern for the EU banking sector. When compared to Q1 of 2018, the average return on equity (ROE) rose in the second quarter from 6.8% to 7.2%. The heatmap shows an improvement in the share of total assets held by banks with ROE above 6%, now 67.1% compared to 64.1% in Q1 of 2018. The RoE's dispersion remains stable with the difference between the upper quartile (10.1%) and the lower quartile (4.0%) at 6.1%.

Loan to deposit ratio reaches the lowest value since 2014. In Q2 of 2018, the ratio decreased to 116.2% when compared to 118.2% in the first quarter of 2018, mainly due to an increase in deposits. The leverage ratio (fully phased-in) remained at 5.1% when compared to Q1 2018. The asset encumbrance ratio decreased from 28.4% in Q1 2018 to 28% in Q2 2018. The liquidity coverage ratio (LCR) rose to 148.2% from 147% in the first quarter of 2018, remaining well above the 100% requirement.

Notes to editors

The figures included in the Risk Dashboard are based on a sample of 150 banks, covering more than 80% of the EU banking sector (by total assets), at the highest level of consolidation, while country aggregates may also include large subsidiaries (the list of banks can be found here https://eba.europa.eu/risk-analysis-and-data).

IFRS 9, which entered into force on 1 January 2018, may have had an impact on some of the ratios included in the dashboard.