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EU banks increase capital ratios, reduce bad loans, says EBA

European banks increased their capital ratios in the third quarter of 2016 and reduced their ratio of non-performing loans (NPLs), the European Banking Authority (EBA) has said in its latest risk dashboard.19 Jan 2017

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

The banks' ratio of common equity tier 1 (CET1) increased by 50 basis points (bps) in the third quarter of 2016, to 14.1%, 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 (RWAs), and is a measure of a bank's financial strength.

The improvement in capital ratios is explained by growth in capital and a reduction in RWAs, the EBA said.

The ratio of NPLs fell a further 10 bps to 5.4%, although the variation between countries remains wide, ranging from 1% to almost 50%, the EBA said. The ratio was highest for smaller banks, at 23.7%, than for medium banks at 11.9% and large banks at 4%.

"Subdued profitability" remains a concern, the EBA said.

"The annualised return on equity (RoE) [in the quarter] decreased to 5.4%, one percentage point below the third quarter last year," it said.

The RoE also decreased when compared to the second quarter, when it was 5.7%, "showing its typical seasonality", the EBA said.

Variation among countries remains wide in profitability too, ranging from around 10% to 19%, it said.

Banks' loan-to-deposit ratio "kept its downward trend", the EBA said, decreasing to 120.1%, compared to 120.5% in the former quarter. With the exception of large institutions the ratio has declined in all banks sizes’ classes, to 134.6% for mid‐sized and 80.9% for small banks.

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.