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EU banks in better shape – but NPL levels still at historical highs

Further progress is need on non-performing loans (NPLs) in Europe, according to the latest European Banking Authority (EBA) report on risks and vulnerabilities in the EU banking sector.

The EBA found that the EU banking sector is resilient and describes the current macroeconomic and financial environment as 'benign'. It says there has been an additional strengthening of the capital position, an improvement of asset quality and a slight increase of profitability. The report added that the long-term sustainability of prevailing bank business models remains a challenge.

The report highlighted four areas:

1. Progress on NPLs

EU banks have made progress on reducing their NPL ratios – but many still have levels above 10 per cent and the level of NPLs still remains at a very high historical level of €893 billion, according to the EBA. The report found that the NPL ratio of EU banks decreased from 5.4 per cent (as of June 2016) to 4.5 per cent, reflecting progress made by EU banks to clean-up their balance sheet.

2. Better solvency

The report found that solvency in the EU banking sector has continued to strengthen, albeit at a slower pace. The common equity tier one (CET1) ratio stood at 14.3 per cent as of June 2017, up by 70 bps with respect to June 2016 level.

3. Profitability still a challenge

The report found that profitability has cautiously improved supported by the benign environment but still remains a key challenge for the EU banking sector. As of June 2017, the average return on equity (RoE) stood at 7.0 per cent, up by 130 bps year on year, its highest level since 2014. This upward trend is mainly explained by a decrease in impairments, an increase of fees and commissions and an increase of trading profits.

4. New cybersecurity risks

The report said the fast-changing environment has meant that significant new risks have emerged. Cyber and data security are among the most challenging ones for the EU banking sector. The EBA stated: “In addition, risks posed by cyberattacks, their volume and sophistication are unabatedly high. While banking operations have become increasingly dependent on IT platforms, cost pressures and operational challenges have contributed to an increasing reliance on third party service providers that a range of IT services and data are outsourced to.”

This item appears in the following sections:
Bank Relationship Management & KYC
Evaluating Banks' Overall Performance
Cash & Liquidity Management
Cash & Liquidity Management in Europe

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