The latest Dashboard from the European Banking Authority showed last week that the average return on equity of bank had fallen by half a percentage point to 2.0% in the fourth quarter of last year. The costs of equity capital are on average four times higher at European banks. The demand for credit is expected to rise sharply as the vaccinations end the corona pandemic and the economic recovery sets in. Small and medium-sized companies in particular will turn to banks. But chances are they won’t meet demand, which could break recovery in the bud.

Capital ratios continued to improve in Q4. This was driven by an increase in capital, which more than offset a slight rise in risk weighted assets. The CET1 ratio reached a new all-time high of 15.5% on a fully loaded basis, up by 40bps quarter-overquarter (QoQ). Also the lower end of the dispersion recorded an increase. The leverage ratio (on a fully loaded basis) increased to 5.8% from 5.5% in the previous quarter. This was supported by growing capital, but also a decline in total assets. The latter
was the result of lower volumes of loans and advances as well as debt securities, whereas cash balances slightly increased. The decline in debt securities was similarly reflected in decreasing sovereign exposures.

The non-performing loan (NPL) ratio decreased by 20bps to 2.6%. The decline was due to a contraction in NPLs, which exceeded the decrease in loans and advances. NPL sales contributed to a large extent to this trend in Q4. NPL ratios declined for both households and non-financial corporates (NFCs). While the NPL ratio declined for most economic sectors it increased materially for accommodation and food services (up from 7.8% to 8.5% QoQ) and arts, entertainment and recreation (up from
6.7% to 7.3%). Amid an only small rise in forborne exposures and despite the decline of the numerator, the forbearance ratio remained unchanged at 2%. The share of stage 2 loans reached 9.1% in Q4, showing a 110bps increase QoQ.

Loans under EBA eligible moratoria nearly halved in Q4. They declined from around EUR 590bn in Q3 to around EUR 320bn in Q4. The decline was more pronounced for NFC exposures than for loans to households. The share of stage 2 loans under moratoria (26.4%) is above that for loans under expired moratoria (20.1%) and nearly three times the ratio for total loans (9.1%). It might indicate that loans still under moratoria might be those with higher risks looking forward, even though it is too early to draw conclusions. On the other hand, the NPL ratio is lower for loans under moratoria (3.3%) than for those under expired moratoria (3.9%). This might be due to the fact that the “past due” criterion kicks in for the latter. Loans under public guarantee schemes (PGS) reached about EUR 340bn, up from around EUR 290bn in Q3. Whereas for PGS loans the share of stage 2 loans (11.7%) was above the overall average of 9.1%, the NPL ratio (1.1%) was less than half of the overall average (2.6%).

Profitability remained strongly subdued. Return on equity (RoE) declined from 2.5% in Q3 to 2% in Q4. The rise in net fee and commission income could not compensate for the decline in net interest income. The latter was due to the contraction in interest bearing assets, amid a flat net interest margin. Cost of risk remained elevated at nearly unchanged 75bps, but with a huge dispersion, indicating that situations seem to be quite different between individual banks. The cost to income ratio rose
by 40bps to 65.1% in Q4. Both, staff expenses as a percentage of equity increased slightly from 10.1% in Q3 to 10.3% in Q4, and other administrative expense from 8 to 8.1%.

The loan to deposit ratio declined from 113.6% in Q3 2020 to 112.2% in Q4, supported by a rise in client deposits from households and NFCs. The asset encumbrance ratio remained unchanged at 27.9%. The liquidity coverage ratio (LCR) reached 173.1% in Q4 (171.2% in Q3).

EBA Dashboard – Q4 2020