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R I S K A S S E S S M E N T O F T H E E U R O P E A N B A N K I N G S Y S T E M — J U N E 2 0 1 4
3.2 Asset quality
The quality of banks’ loan portfolios continued
to decline in 2013 and in first months of 2014
and remains a concern, harmfully contribut-
ing to the continuation of elevated risk premi-
um levels on European banks. Notwithstand-
ing this, the impairments are showing some
signs of stabilisation and the weighted aver-
age of the coverage ratio has been increasing
since December 2011. At the same time, in
some cases, provisioning has not increased
in conformity with rising credit risks and an
increasing dispersion is being observed and
translated into more banks and respective as-
sets with a coverage ratio of less than 25 %.
This mixed picture in terms of coverage ratio
continues to raise some questions about the
extent to which provisioning is adequate and
about the capacity of some banks to cope with
rising credit risks. The balance-sheet clean-
up of EU banks with significant front-loading
provisioning, as pre-emptive measures in
preparation for the EU wide asset quality re-
view and stress test exercise, are contributing
to profitability pressures.
On the other hand, there is evidence that banks
have been selling non-performing loans to in-
vestors and a composition effect, by refocus-
ing on some activities or improvements in
credit risk management, may partly explain
lower levels in the coverage ratios for some
banks (e.g. mortgage lending instead of com-
mercial lending, more guarantees). Given the
belief that mortgage portfolios have generally
recognised lower losses, the average provi-
sioning levels for exposure to real estate con-
tinue to deserve particular attention and close
monitoring. Moreover, the increase in the lev-
el of impairment provisioning may pose chal-
lenges in maintaining adequate capital levels
in some cases.
Asset quality still showing some
According to the KRI, impaired loans are still
showing a deterioration but with some signals
of stabilisation (after a significant increasing
trend since March 2011). The ratio of impaired
and past due (> 90 days) loans to total loans
increased slightly from 6.7 % in June 2013 to
6.8 % in December 2013. On the other hand,
the 75th percentile continues to present high
levels of approximately 16 % despite a de-
crease in comparison to June 2013 (from
17.6 % to 16.2 %), which is well above histori-
cal levels for this ratio. However, this is also
influenced by the decrease in the denominator
(total loans and advances).
Table 1: Overview of floors and caps in the stress test common methodology (
: EBA)
Net interest income
End 2013
Para 181
Interest expense
End 2013
Para 172
Net interest income
End 2013
Net fee and commission income
End 2013
Non interest income/total assets cannot be larger
than 2013 (adverse) — Para 197
Net trading income after stress (compre-
hensive approach)
net trading income
before stress
Para 99
Net trading income after stress (simpli-
fied approach)
net trading income
before stress
Para 110
Administrative and other operating
End 2013
Para 186
Impairment of financial assets
Impairment on non financial assets
Pre-tax profit
30 % or pre tax profit
per year of exercise
in P&L template
Net income
Net income of the year net of esti-
mated dividends
Pay-out ratioaverage
in P&L template
RWA per regulatory portfolio
End 2013
Para 89
RWA operational risk
End 2013
Para 211