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Non-performing loans and low profitability main risks for banking sector

High ratios of non-performing loans (NPLs) and "squeezed" profitability are the main challenges faced by the EU banking sector, the European Banking Authority (EBA) has said.05 Apr 2017

EU banks' ratio of common equity tier 1 (CET1) has reached a new high, up 20 basis points (bps) to 14.2%, the EBA said in the latest update to its risk dashboard.

CET1 capital ratio is a measurement of a bank's core equity capital or CET1 divided by its total risk-weighted assets (RWAs), and is a measure of a bank's financial strength.

The increase in CET1 ratios is mainly explained by a 0.7% decrease in RWAs, and by asset disposals by a few large banks, as capital remained broadly unchanged, the EBA said.

The ratio of non-performing loans was 5.1%, the risk dashboard said. This is 30 bps below the third quarter of 2016 and suggests that supervisory efforts "are bearing fruit, albeit slowly", but is still a concern with ratios varying from 1% to 46% across countries, the EBA said.

More than half of the banks have said they plan to increase their volumes of corporate and SME financing portfolios, as well as residential mortgage and consumer loans, it said.

Profitability remains a concern, with the average return on equity reaching its lowest level of 3.3% in the fourth quarter of 2016, 2.1% below the third quarter, showing "usual seasonality", the EBA said.

Variation among countries remains wide in profitability too, ranging from around 11% to 17%, it said.

The net interest margin, calculated on net interest income to interest bearing assets, remained stable at 1.5% in the fourth quarter, while the loan‐to‐deposit ratio "kept its downward trend", achieving its lowest level at 118.4% in the fourth quarter, compared to 120.1% in the previous quarter, mainly due to deposit growth, the risk dashboard said.

The figures covered in the dashboard are based on a sample of 156 banks, covering more than 80% of the EU banking sector by total assets, the EBA said.