EBA: Banks remain robust but higher interest rates could impact asset quality

The European Banking Authority (EBA) today published its Q3 2023 quarterly Risk Dashboard (RDB) together with the Risk Assessment Questionnaire (RAQ). The publication also includes information on minimum requirement for own funds and eligible liabilities (MREL). EU/EEA’s banks remained highly profitable, well capitalised and maintained robust liquidity. Banks expect the asset quality to deteriorate as higher interest rates affect borrowers.

• The economic activity in Europe remains subdued and macroeconomic uncertainty is high as the monetary policy response to high inflation is still working its way through the economy, easing inflationary pressures materially during the last months of 2023.
• EU/EEA banks maintained robust capitalisation levels, with weighted average CET1 ratio (fully loaded) at 15.8%, 10bps lower than the historical high of 15.9% reported in the previous quarter and 100bps higher than September 2022. RWAs slightly increased, mainly driven by credit risk.
• MREL shortfall appeared marginal at 0.25% of RWAs on EU/EEA level as of Q2 2023, yet two countries reported a MREL shortfall between 5% and 7% of RWAs.
• Liquidity ratios remained at high levels, despite their slight decrease. Market funding conditions remained benign, as banks managed to issue more, by November 2023, across nearly all debt classes than in previous years.
• Tightened lending standards observed across the EU have so far not led to a decrease in outstanding loans to non-financial corporates (NFCs) and households. Yet, loan growth remained subdued. The autumn risk assessment questionnaire (RAQ) showed that banks were reluctant to increase their lending exposures.
• Asset quality remained robust. Real estate related exposures (both commercial and residential) appear more vulnerable, as a higher share of banks, compared to previous RAQ, expect a deterioration in the asset quality of these portfolios.
• Return on Equity (RoE) of EU/EEA banks was reported at 10.9%, supported by widening net interest margins (1.62% in Q3 2023) and net interest income generation.
• Operational risks remained elevated for EU/EEA banks driven by cyber and data security, followed by conduct and legal risks, similar to previous RAQs. An increasing share of banks, compared to previous RAQs, cites fraud as a main operational risk.

Key indicators have been visualised in a dynamic way. To facilitate the navigation, here is the full list of key indicators that you can find in the graphs:

• Slide 1 (capital ratios): EU/EEA banks maintained high levels of capital [DOWNLOAD DATA]
• Slide 2 (liquidity ratios): Liquidity of EU/EEA banks remained high [DOWNLOAD DATA]
• Slide 3 (Deposit betas RAQ): Banks expect deposit betas to increase [DOWNLOAD DATA]
• Slide 4 (asset quality): Asset quality of EU/EEA banks remained robust [DOWNLOAD DATA]
• Slide 5 (asset quality RAQ): Banks expect deterioration in the asset quality [DOWNLOAD DATA]
• Slide 6 (profitability): Banks reported double digit return on equity [DOWNLOAD DATA]
• Slide 7 (MREL): MREL shortfall of EU/EEA banks is small (0.25% of RWAs) but few banks still report considerable shortfalls [DOWNLOAD DATA]

The figures included in the Risk Dashboard are based on a sample of 164 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).