EBA report outlines risks and vulnerabilities in EU banking sector
Banks in Ireland* have ranked well in the latest quarterly Risk Dashboard published by the European Banking Authority (EBA). The Dashboard (available here) summarises the main risks and vulnerabilities in the EU banking sector, as well as providing useful comparative data on the banking sector across individual EU countries.
In terms of asset quality in the sector, which is measured as the ratio of non-performing loans (NPLs) to total loans, the report notes that the NPL ratio for Q2 2019 declined to 3.0% from 3.1% in the previous quarter, mainly due to declining NPLs as opposed to increased loans in the previous quarter. Banks in Ireland have made significant progress in reducing their NPL ratios and it stood at 4.6% as of June 2019 compared to 14.4% in September 2016.
EU banks’ capital ratios have remained broadly stable since Q3 2018 and the total capital ratio was at 18.9% as of end of June 2019. Total capital ratio for banks in Ireland included in the sample was 21.2%, the fifth highest in the Eurozone. Another useful indicator for measuring capital levels across banks, leverage ratio, shows that banks in Ireland had a leverage ratio of 9.5%, nearly double the EU average of 5.2% and the fourth highest in the eurozone.
Additionally the data shows that low profitability is a key challenge for the European banking sector with rising economic and political uncertainty likely to have a negative effect on future profitability of the sector, as new lending volumes might suffer from a worsening in the general economic conditions. Return on equity, which is an estimate for profitability, was 7.0% as of the second quarter of 2019 and was lower than a year ago. This ratio stood at 6.8% as of end of June 2019 for banks in Ireland included in the EBA analysis, compared to 8.4% in September 2018.
“Comparatively speaking, these measures from the European Banking Authority (EBA) show banks in Ireland in a generally good light, particularly in terms of their capital ratios and their improved asset quality”, states Brian Hayes, BPFI Chief Executive. “As with banks elsewhere the most significant challenge for our banks is likely to be on the profitability front.”
*Reporting institutions from Ireland include AIB Group plc, Bank of America Merrill Lynch Designated Activity Company, Bank of Ireland Group plc, Barclays Banks Ireland Plc, Citibank Holdings Ireland Limited and Ulster Bank Ireland Limited.
Note: Banking & Payments Federation Ireland (BPFI) represents the banking, payments and fintech sector in Ireland. Together with its affiliates, the Federation of International Banks in Ireland and the Fintech & Payments Association of Ireland, BPFI has 100 member institutions and associates, including licensed domestic and foreign banks and institutions operating in the financial marketplace here.
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