Page 34 - EBA 2013.2869 Risk Assesment Report final proof4

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E U R O P E A N B A N K I N G A U T H O R I T Y
32
6. Income and profitability
During the end of 2012, EU banks’ income
and profitability levels have continued to be
faced with significant headwinds which are
not likely to dissipate in 2013. EU banks have
seen their net interest margins compressed
while the weak economic environment pro-
vides limited new lending opportunities, with
banks scrapping for the few quality credits
that exist and leaving some question marks
over some institutions’ future profitability
and viability.
Persistent low interest rates are also putting
pressure on the business model sustainabil-
ity of banks which find overall net interest
margins squeezed, contributing to profitabil-
ity pressures. Given the fact that customer
capacity to bear higher lending rates is af-
fected by the economic downturn, banks’ at-
tempts to increase lending rates may prove
not possible and even insufficient to address
a low interest rates environment and increas-
es in funding costs in some cases. Thus, net
interest margins are pressured and are not
being matched by a full re-pricing of assets.
Fee and commission incomes, which have tra-
ditionally been an important source of earn-
ings for banks, are also under pressure due
to low economic growth. The reduced demand
for banking products and services blunts
growth-generated earnings hikes. In order
to reduce expenses and improve efficiency
controls, banks are also trying to cut costs,
mostly staff-related through lay-offs and re-
adjusting the remuneration structures as well
as utilising economies of scale and innova-
tions. However, the cost-to-income ratio and
similar indicators point also to some deterio-
ration of banks’ ability to keep relative costs
under control.
Reflecting the continued macro-deterioration
and some deep recessions in parts of the EU,
the credit costs are rising and this trend shows
no sign of reversal. Concurrently, more trans-
parency on impairments and potential losses
are leading to higher levels of loan–loss provi-
sions. When benchmarked against low growth
and flat or declining volumes of loans, higher
credit costs are an important driver for weak-
er earnings, putting bank profitability at risk
and removing an important source of capital
growth and banks’ performance.
The KRIs show that the return on equity (RoE)
in December 2012 decreased. The weighted
RoE and the 25th percentile have signifi-
cantly decreased (from 1.7 % and – 0.9 % in
June 2012, to 0.6 % and – 4.6 % in December
2012, respectively). The median and the 75th
percentile have also eroded since March 2012
(from 6.5 % and 11.6 % to 3.2 % and 7.4 % in
December 2012, respectively).
– 60 %
– 40 %
– 20 %
0 %
20 %
40 %
60 %
Dec 09
Mar 10
Jun 10
Sep 10
Dec 10
Mar 11
Jun 11
Sep 11
Dec 11
Mar 12
Jun 12
Sep 12
Dec 12
– 400 %
– 300 %
– 200 %
– 100 %
Figure 25: Return on Equity (
source:
KRI) —
5th and 95th percentiles, interquartile range and median