EBA Risk Dashboard points to stabilising return on equity in EU Banks but challenges remain for those banks with exposures to the sectors most affected by the pandemic

• In Q2 2021, banks’ return on equity (RoE) remained at levels similar to Q1, not least due to low impairments.
• Capital and liquidity ratios remained strong.
• While the non-performing loan (NPL) ratio declined, asset quality of loans under moratoria and public guarantee schemes (PGS) further deteriorated.
• Cyber and information and communication technology (ICT) related risks remained high.

The European Banking Authority (EBA) published today its Risk Dashboard for the second quarter (Q2) of 2021. The data indicate that banks are benefitting from the economic recovery with RoE remaining broadly similar to the previous quarter. Capital ratios remained stable and there was a further decline in NPL ratios. Operational risks remain elevated mainly due to cyber and ICT related risks.

Profitability was roughly stable. RoE decreased to 7.4% in Q2 2021 from 7.7% in the previous quarter, with the lower end of the 5th percentile moving further into negative territory. On average, banks benefitted from the economic recovery, not least resulting in lower impairments and a rise in fee and commission income. Net interest income did not show any major benefit from positive economic developments, and the net interest margin (NIM) remained stable at 124bps. There are indications of rising operating expenses amid a resumption of pre-pandemic working arrangements, including a return to the office, resumption of some business travels, and similar measures.

Banks maintained strong capital levels. The average CET1 ratio remained unchanged at 15.5% on a fully loaded basis in Q2 2021, amid a parallel rise in CET1 capital and risk weighted assets (RWA). The leverage ratio increased from 5.6% in Q1 2021 to 5.7% in Q2 2021 on a fully loaded basis, reflecting higher capital as well as a slight decrease of total assets during the quarter.

The Liquidity Coverage Ratio (LCR) remained high. LCR declined from 173.6% in Q1 to 172.4% in Q2 2021. Its dispersion shows that the lower end of the LCR’s 5th percentile remains well above 100%. The contraction of the loan to deposit ratio continued, reaching 108.9% in Q2 (110.9% in Q1) due to a strong increase in client deposits. Overall, the latter increased, but with diverging trends for households and non-financial corporates (NFC). On the other hand, deposits from households continued their rising trend while NFC deposits declined. The relatively strong increase in the asset encumbrance ratio during the previous quarter flattened again, slightly rising from 28.8% as of Q1 to 29.1% in Q2 2021.

The aggregate NPL ratio continued to decline, reaching 2.3% at end Q2. Due to the uneven impact of the pandemic on corporates, sector level data confirms increasing divergence of asset quality. For accommodation and food services, the NPL ratio rose further from 9% to 9.6% quarter on quarter (QoQ) and for arts, entertainment and recreation from 7.9% to 8.2%. Forborne loans increased further and were up by 3.7% in Q2. The forbearance ratio rose accordingly by 10 bps to 2.1% in Q2. The stage 2 ratio declined from 9.0% to 8.8% QoQ.

Asset quality of exposures under moratoria and PGS deteriorated further. Whereas loans under existing EBA eligible moratoria declined by EUR 80bn in Q2 to EUR 123.4bn, PGS loans remained roughly stable at around EUR 377bn. The NPL ratio increased from 3.9% to 4.5% for loans under current moratoria, from 4.5% to 4.7% for loans under expired ones and from 1.4% to 2.0% for PGS loans. In Q2 2021, the share of stage 2 loans increased by 1p.p. to 28.2% for loans currently under moratoria, while it reached 24.4% (up from 23.6% in the previous quarter) for loans with expired moratoria. For PGS exposures it increased from 13.6% to 18.5%.

Cyber and ICT related risks remain elevated even though no major successful cyber-attack has been reported. Amid higher levels of online banking and remote working as well as increased reliance on third party providers, banks' ICT systems remain vulnerable to significant disruptions in their operations. Conduct-related risks remain high too, stemming from areas like COVID-19 support measures or the upcoming LIBOR and EONIA replacements. In addition, inadequately addressed environmental, social and governance (ESG) factors and considerations can impact institutions’ counterparties or invested assets and increase conduct risk.

Notes to editors

The figures included in the Risk Dashboard are based on a sample of 131 banks, covering more than 80% of the EU/EEA banking sector (by total assets), at the highest level of consolidation, while country aggregates also include large subsidiaries (the list of banks can be found here).