While the profitability of EU banks remains resilient, the sector is facing emerging credit risks, according to the European Banking Authority’s quarterly risk dashboard for Q1 2024, on Thursday 20 June 2024. The EBA dashboard showed that banks across the 30-member European Economic Area–which includes the European Union along with Iceland, Liechtenstein and Norway–achieved a return on equity of 10.6% for Q1 2024, slightly higher than the 10.4% recorded a year ago. Net interest margins widened to 1.69%, reflecting a 3 basis points increase quarter-on-quarter. However, banks expressed concerns over potential impacts on interest income and overall profitability amid ongoing monetary easing and anticipated rate cuts.
Capital requirements
The common equity tier 1 (CET1) ratio for EU/EEA banks remained stable at 15.9% in Q1 2024, unchanged from Q4 2023 and up by 20bps from Q1 2023. According to the EBA, strong organic capital growth offset increased capital requirements, primarily driven by higher countercyclical capital buffers. While the net stable funding ratio marginally increased to 127.2%, the liquidity coverage ratio declined from 168.3% to 161.4% over the quarter, returning to levels last seen in Q3 2023. This shift in LCR composition reflected declines in cash components and a rise in central government debt holdings, said the EBA.
Loan portfolios
EU/EEA banks also observed a 0.2% quarter-over-quarter decline in outstanding loans to households and businesses. The decline was driven by reductions in small and medium-sized enterprises loans (down 0.8%) and mortgages (down 0.3%), partially offset by increases in consumer credit and commercial real estate loans. Banks indicated intentions to expand loan exposure across most segments, excluding commercial real estate.
Loan defaults
Defaulted or non-performing loans rose by 2% over the quarter, amounting to €7bn, with a default rate of 1.86%. The increase was widespread, particularly affecting SMEs. Despite a slight decrease in stage 2 allocations to 9.4% in Q1 2024 from 9.6% in Q4 2023, the cost of risk climbed to levels not seen since the 2020 pandemic.
Cyber risks
Operational risks, notably cyber risks and data security, ranked prominently in the risk assessment questionnaire. Banks reported increased instances of sophisticated cyber-attacks, highlighting vulnerabilities in operational frameworks.
Digital currencies
The potential introduction of central bank digital currencies (CBDCs) emerged as a significant concern for EU/EEA banks as well. They foresee heightened operational expenses, increased funding costs and declining fee income, as CBDCs could potentially reshape the banking landscape, noted the EBA.
The full EBA report is available .
