EBA: European bank capital improving but concerns remain over profits and assets

The European Banking Authority (EBA) announced the results of its 2015 transparency exercise today (November 24). Commercial banks in the European Union have improved their capital ratios, but their exposure to non-performing loans remains a "major concern", the EBA said.

There was some reason to believe EU banks were moving away from de-leveraging and towards "stabilisation and growth", the EBA added, though it called improvements in banks' capital "very gradual".

The EBA expressed worries over banks' profitability despite an apparent upturn in the six months to June 2015. Profitability was still "low by historical standards", the EBA said. This was even though the banks' aggregate return on risk capital (RoRC) had risen from 4.65% in December 2014 to 9.1% in June 2015.

Since some of the rise might be due to "seasonal effects" leading to over-estimation of RoRC, European banks' profitability "remains a source of concern". Squeezes on banks' interest margins, high levels of impairments, limited efficiency gains and large provisions for risk were all weighing down on banks' profits, the authority said.

EU banks had "in general" continued strengthening their capital positions, the EBA said, "mainly through raising additional equity and retaining earnings". Aggregate common equity Tier 1 (CET1) capital ratios in the banks surveyed had risen to 12.8% in June 2015.

EU banks' lending to the real economy had increased "gradually", the EBA said, with loans to corporates and retail rising in the first half of 2015 by €3.9 billion, or 3.9%, since the beginning of the year.

This, together with the data on improving capital ratios, indicated increases in capital "do not prevent banks from lending" but were instead a "precondition for it", the EBA argued. Analysis of the data reinforced this point, the EBA said, showing banks that most increased their capital between December 2013 and December 2014 had most increased lending in the six months to June 2015.

Asset quality for EU banks was "gradually improving" but remained a "major concern", the EBA said. Surveyed banks reported an aggregate weighted non-performing exposure (NPE) ratio of 5% for all on-balance-sheet debt instruments and 5.6% for loans and advances.

NPE ratios differed widely between countries. Aggregate Swedish level of NPEs in loans and advances was 1% in June 2015, against a level for Cyprus of 50%. The total of non-performing loans in the reporting banks across Europe represented 7.5% of total GDP, the EBA said.

The EBA also expressed concern about varying practices across Europe in loan forbearance, saying that some of these might mask a reluctance to acknowledge that loans were non-performing.

For the first time in an EBA disclosure exercise, a set of bank-by-bank leverage ratio data was published. Aggregate leverage ratios had improved, reaching a level of 4.9%, the EBA said. There was, however, wide variation between banks' leverage ratios, it noted. The exercise covered 105 banking groups from 20 countries from the EU, and Norway. The banks included in the exercise had total assets of approximately €30 trillion, the EBA added, making up "more than 67% of total EU banking assets".

The 2015 exercise was the first to be based as far as possible on the supervisory data submitted by banks to the EBA. Data on non-performing exposures and forborne loans was collected separately by the EBA. Relying mainly on the regularly submitted data should reduce the regulatory burden on banks while ensuring "harmonised and fully comparable figures across the EU", the EBA said.

Transparency exercises are conducted in years when the EBA does not feel that a stress test is necessary, the authority said. The EBA has conducted either stress tests or transparency exercises every year since 2011.