Page 22 - EBA 2013.2869 Risk Assesment Report final proof4

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Asset quality
The quality of banks’ loan portfolios contin-
ued to deteriorate throughout 2012 and the
first months of 2013. The September and De-
cember 2012 KRIs, and the responses to the
RAQ on asset quality both point to a contin-
ued deterioration of asset quality in the last
few months. The deterioration in asset qual-
ity is spread across the EU; however, the de-
clining intensity varies considerably across
portfolios and geographies.
According to the KRIs, loans in arrears, and
impaired assets in particular continue to
increase showing that asset quality is still
declining. On the other hand, provisioning in
some cases has not increased in conformity
with rising credit risks. While the weighted
average of the coverage ratio has been in-
creasing since December 2011, an increas-
ing dispersion is being observed and trans-
lated into more banks and respective assets
with a coverage ratio of less than 25 %. Thus,
there is a mixed picture in terms of coverage
ratio, which continues to raise several ques-
tions about the extent to which provisioning
is adequate. Refocusing on some activities
such as mortgage lending instead of com-
mercial lending might partly explain a re-
duction in the coverage ratios (composition
effect). However, whereas it is known that
mortgage portfolios have generally recog-
nised lower losses, the average provisions
for exposures to real estate continues to
raise some doubts.
The RAQ respondents also expect the level of
non-performing loans to remain high. Such
deterioration would require increasing im-
pairment provisioning, in line with deterio-
rating asset quality and increasing residual
credit risk throughout loan portfolios. This
trend would not only adversely affect already
subdued earnings, but in some cases may
also pose challenges to the maintenance of
adequate capital levels. In addition, both dif-
ferent national approaches and banks’ widely
differing practices at EU level to address not
only asset quality concerns, but also debt
forbearance, creates significant uncertain-
ties; therefore, coordinated supervisory ac-
tions would be crucial to restore market con-
Loans in arrears and impaired assets
The most recent evolution set of KRIs contin-
ue to reflect increasing credit risks and de-
clining asset quality, as both the ratio of im-
paired loans and past due loans to total loans
and the ratio of accumulated impairments
on financial assets to total assets once again
increased within the last semester. Also the
ratio of impairments on financial assets to to-
tal operating income increased markedly in
the last quarter.
Impaired loans continue to show an increas-
ing trend. The ratio of impaired loans and
past due (> 90 days), in terms of weighted
average, increased from 6 % in June 2012 to
6.3 % in December 2012 (the highest since
2009). Interestingly, the median and the 75th
percentile decreased in the last quarter, af-
ter significant increases in September 2012.
Nevertheless, the 75th percentile continues
to present concerning levels of approxi-
mately 14 %, well above historical levels for
this ratio. The dispersion also continues to
be significant, achieving the highest level in
September 2012 (since 2009). Banks with a
ratio of more than 10 % represented 12.5 %
of total assets in December 2012 (from ap-
proximately 11.6 % and 12 % in December
2011 and June 2012, respectively).
A trend in growing geographical dispersion
of asset quality indicators across Europe
can also be identified. Impairments contin-
ued to increase particularly in banks in fi-
nancially stressed countries, but they have
also increased in other regions. Real estate
portfolios have been particularly affected
and deserve attention. Banks from five
countries have values of impaired loans and
past due loans to total loans of more than
16 %, while the figure is less than 2 % only
for two banks from other countries (there
were four countries in June 2012, confirm-
ing the increase of the 25th percentile from
2.8 % to 3 %).
In regard to the coverage ratio, an increasing
dispersion is being observed (the difference
between the 25th and the 75th percentile is
the highest since December 2010). Whereas
the weighted average has been increasing
since December 2011 and shows one of the
largest levels since 2009, the median (and
the 75th percentile) continues to decrease.
Banks with a coverage ratio of less than 25 %