The European Banking Authority (EBA) published today its eighth semi-annual report on risks and vulnerabilities in the EU banking sector. The report shows that EU banks have continued to strengthen their capital position and to improve asset quality. However, the level of non-performing exposures remains high and profitability is still weak. The report also analyses the exposures towards emerging market (EM) countries and non-bank financial intermediaries.
Throughout the first half of 2015, EU banks continued to strengthen their capital ratios, mainly due to retained earnings. Banks' equity tier 1 (CET1) ratio was 12.5 % in June, 40bps higher than in December 2014(1). This improvement has been accompanied by a modest recovery of loans and increase in risk-weighted assets.
Asset quality improved although trends differ significantly across countries and banks. The ratio of impaired and past due loans to total loans decreased to 6.4 % in the first half of 2015, compared to 7 % at the end of 2014, and the coverage ratio increased. Banks' expectation of further gradual improvements in asset quality depends on the progress of economic recovery, which in turn is strongly dependent on developments in emerging markets.
Banks' return on equity was 7.8 % per June 2015, 210bps higher than one year before. Despite the improvement, profitability remains weak. Banks' interest margins continue to be under pressure in a context of low interest rates. Moreover, the level of impairments, still high in many jurisdictions, together with conduct-related costs and low efficiency ratios keep their negative drag on banks' profitability.
Volatility in banks' funding spreads demonstrates an overall fragile state of financial markets. While no major constraints could be observed in the issuance activity for secured and unsecured instruments, issuance volumes of subordinated funding have partially been subdued. On the other hand, banks have even been able to increase volumes of customer deposits even though interest rates for deposits have been on long-time lows.
(1) The sample of banks in the report is smaller compared to the one used in the EBA's 2015 Transparency Exercise.