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July 19, 2018

EBA published the periodical update to its Risk Dashboard for the first quarter of 2018. The dashboard summarizes the main risks and vulnerabilities in the EU banking sector using quantitative risk indicators, along with the opinions of banks and market analysts from its Risk Assessment Questionnaire. In the first quarter of 2018, the updated dashboard identified ongoing improvements in the repair of the EU banking sector but also residual risks in banks' profitability. The Risk Dashboard confirms steady improvements in the management of nonperforming loans (NPLs) across the EU but bank profitability remains a key challenge.

European banks' capital ratios remained high, albeit with a slight decrease in the first quarter of 2018. The common equity tier 1 (CET1) ratio experienced a decrease of 50 bps, from 14.9% to 14.4% in the first quarter of 2018, mainly driven by a decrease in CET1 capital (retained earnings), also linked to the adoption of the new accounting framework (IFRS 9). Compared to the previous quarter, the fully loaded CET1 ratio decreased by 40 bps to 14.2% and the total capital ratio by 40 bps to 18.7%. EU banks continued to improve the overall quality of their loan portfolio. In the first quarter of 2018, the average ratio of NPLs continued its downward trend, reaching its lowest level since the fourth quarter of 2014 (3.9%). This result is jointly explained by an increase in the outstanding volume of loans granted and a decrease of NPLs by almost one-third in three years, from over EUR 1.12 trillion to EUR 779.2 billion. Despite the progress, additional efforts are still needed to reduce the volume of legacy assets.

The loan-to-deposit ratio remained broadly stable, reaching 118.5% with an increase of 100 bps from the previous quarter. The leverage ratio (fully phased-in) decreased by 30 bps from 5.4% (Q4 2017) to 5.1% (Q1 2018), reflecting the impact of the new accounting framework (IFRS 9). In March, the average liquidity coverage ratio (LCR) was 147.0%, well above the threshold defined as the liquidity coverage requirement for 2018 (100%). Regarding the future of EU banks' funding, the results of the EBA Risk Assessment Questionnaire suggest that going forward, banks expect to target mainly retail deposits and attain more instruments eligible for MREL, even though they consider the uncertainty on the specific MREL requirements as a constraint to their issuance. The results of the Risk Assessment Questionnaire also show that cyber risk and data security are considered as the main drivers for the increase in operational risk. They are also assumed to be the main factors that might negatively influence market sentiment, along with geopolitical uncertainties including the UK's decision to leave the EU.

 

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Keywords: Europe, EU, Banking, Risk Dashboard, NPLs, IFRS 9, EBA

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