Capital ratios have remained at record levels. The total capital ratio reached 20.1% as of June 2024, representing a YoY increase of 14 bps. This was primarily driven by the CET1 component, which rose by 12 bps to an all-time high of 16.1% as of June 2024. Overall, CET1 capital rose by about 4% from EUR 1.51 tn in June 2023 to EUR 1.57 tn as of June 2024. The increase in capital and respective ratios was supported by rising retained earnings and comparatively slower growth in RWA, even with increased payouts. Capital generation outpacing asset growth also led to a 11 bps increase in the leverage ratio to 5.8% as of June 2024 (Figure 42).

Source: EBA supervisory reporting data

Higher countercyclical capital buffers drive up banks’ capital requirements

EU/EEA banks’ CET1 headroom above overall capital requirement (OCR; Pillar 1, Pillar 2 and the combined buffer requirements) and pillar 2 guidance (P2G), declined slightly by 26 bps in the last year, still standing at a comfortable level of 466 bps as of Q2 2024. This was the result of higher CET1 capital requirements and guidance (OCR and P2G increased by 37 bps) which outpaced the increase in the CET1 ratio (12 bps). Total OCR and P2G reached 11.4% in June 2024. The increase in capital requirements was mainly driven by higher combined buffer requirements (32 bps) and to a lesser extent by higher Pillar 2 requirements (4 bps) and P2G (1 bp) (Figure 43).

Source: EBA supervisory reporting data

The main driver behind higher combined buffer requirements in the last year was the  countercyclical capital buffer, which increased by an average of 23 bps and stood at 0.73% of total RWA as of June 2024. The average capital buffer for systemically important institutions increased by 5 bps in the last year and amounted to 1.12% of total RWA as of June 2024. The systemic risk buffer element increased by 4 bps in the last year to 0.22% of total RWA (Figure 44).

Source: EBA supervisory reporting data

The increase in capital requirements was notable across banks in most countries except for banks in the Czech Republic, which reported a decrease in CCyB rates. Banks in Croatia, Finland, Hungary and Lithuania reported increases in capital requirements of close to 100 bps or more in the last year. While the increase in CCyB rates was the main driver for banks in Croatia and Lithuania, banks in Finland and Hungary reported other elements of the combined buffer requirements to have increased. Compared to the EU/EEA average, banks in Bulgaria, Denmark, Iceland, Norway and Sweden stand out with higher capital requirements, mainly due to the more active use of macroprudential capital buffers in those countries (Figure 45). With countercyclical and systemic risk buffer requirements in some countries expected to be phased-in towards the end of 2024 or in 2025^[1], buffer requirements are set to increase further.

Strong profitability boosted organic capital generationand shareholder remuneration

Solid capital buffers and high profitability helped European banks to distribute record dividend payouts and share buybacks in 2023 (EUR 68 bn representing 52% of year-end 2022 profits). Banks’ plans for the year 2024 indicate a further rise with planned payouts reaching almost EUR 90 bn (around 50% of banks’ profits for the year 2023^[2]).

CET1 capital resources have equally benefitted from strong profitability. Total CET1 capital increased by EUR 60 bn or 4% in the last year and stood at EUR 1.6 tn in June 2024. The increase was almost entirely driven by organic capital generation. Retained earnings have increased by EUR 59 bn or 7% and reserves have increased by EUR 33 bn or 11% in the last year. This increase was partly offset by a decline in capital instruments (i.e. paid-in capital and share premiums) and higher deductions and adjustments. The decline in capital instruments of EUR 19 bn or -3% in the last year represents a continuation of the trend observed in recent years (e.g. -3% in the year to June 2022; -5% in the year to June 2023), reflecting the impact of share buyback programmes that many banks have put in place. As a result, the share of capital instruments has declined to 32% of the main sources of CET1 capital while retained earnings represent 50% as of June 2024 (Figure 46).

Risk-weighted assets increase reflects a changing credit risk profile

Total RWAs increased by 3% in the last year and stood at EUR 9.8 tn in June 2024. The increase was mainly due to credit risk which increased by EUR 240 bn or 3%. Operational risk increased by EUR 75 bn or 8% and market risk by EUR 4 bn or 1% in the same period. The increase was partly offset by decreasing credit valuation adjustment and other risks (EUR 15 bn or -6%). Credit risk remains the largest RWA segment for banks, accounting for 84% of total RWA, followed by operational risk (10%), market risk (4%) and CVA and other risks (2%) (Figure 47).

Comparing credit risk RWA movements with trends in underlying credit exposures reveals changes in banks’ risk profile (see Asset Chapter 2 on asset volume developments). Total credit risk exposures increased by EUR 66 bn or 0.3% in the last year, which contrasts with the 3% increase in credit risk RWA. The overall trend was driven by an increase in exposures to corporates (EUR 190 bn or 2.5%) and to institutions (EUR 86 bn or 3.8%). Retail mortgages, on the other hand, decreased by EUR 16 bn or -0.3% and exposures to central governments and central banks by EUR 237 bn or -3.0% in the last year, with the latter mainly driven by declining central bank exposures (Figure 48).

Diverging trends for RWA vis-à-vis exposure values indicate a change in risk profile for several exposure classes. Focusing on corporates and retail exposures, the most relevant exposure classes for RWA purposes, a trend towards higher risk can be observed. For corporate exposures, the RWA increase of 3.7% outpaced the 2.5% increase of the underlying exposures, resulting in a higher average risk weight for the remaining stock of corporate exposures. Similarly, for retail mortgage exposures, the RWA increase of 0.6% compares with a -0.3% decrease in the exposure value. Other retail exposures (e.g. revolving credit like credit cards or personal lines of credit) saw the most significant change in risk, with the RWA increase of 2.5% standing in stark contrast to the 0.9% increase in underlying exposure value. As a result, the average risk weight density for banks’ total credit risk portfolio rose by 67bps to 28.1% in June 2024 (27.4% in June 2023) (Figure 49).

Abbreviations and acronyms