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EU banks still show low profitability and high levels of non-performing loans, says EBA

European banks have succeeded in increasing their capital ratios but profitability remains low and banks have high levels of non-performing loans, the European Banking Authority (EBA) has said.03 Oct 2016

The EBA's regular risk dashboard looks at the vulnerabilities in the banking sector.

The banks' ratio of common equity tier 1 (CET1) increased by 10 basis points (bps) or 0.1% in the second quarter of 2016, to 13.5%, the EBA said. CET1 capital ratio is a measurement of a bank's core equity capital or CET1 divided by its total risk-weighted assets, and is a measure of a bank's financial strength.

However, the rate of non-performing loans (NPLs) was 5.5%, 10 bps below the first quarter, the EBA said.

EBA chairman Andrea Enria told the European Parliament that "the average ratio of NPLs to total loans in the EU is at 5.7%, three times higher than in other major jurisdictions. In 10 member states the ratio is higher than 12%. High NPLs are a drag on already weak bank profitability, have an adverse impact on the availability of new lending for households and corporates, and may eventually generate detriment to distressed borrowers."

The banks' average return on equity was 5.7%, unchanged compared to the past quarter and around one percentage point below the second quarter of the last year. The cost-to-income ratio stopped the increasing trend of the four preceding quarters and decreased compared to 2015, the EBA said.

Banks' loan-to-deposit ratio decreased to 120.5%, compared to 121.6% in the former quarter.

Banking reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com said: "It will be crucial that the negotiation process for the UK leaving the European Union over the next two and a half years does not result in the further deterioration of an already tenuous position for European banks."

The EBA's figures are taken from a sample of 156 banks, covering more than 80% of the EU banking sector by total assets, it said.