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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
6. Income and profitability
During 2013 and the first months of 2014,
EU banks’ income and profitability levels
have continued to face significant headwinds
which are not likely to disappear in the near
term. In the last quarter of 2013, the total
profits (after tax and discontinued opera-
tions) declined EUR 54 billion (– 29 % com-
pared to June 2013). The main drivers were
the balance-sheet clean-up of EU banks as
pre-emptive measures in preparation for the
EU wide asset quality review and stress test
exercise, as well as, litigation costs.
Some question marks over some
institutions’ future profitability and
In 2013, the specific allowances for loans in-
creased by EUR 43 billion (11 % in compari-
son with December 2012). At the same time,
EU banks have seen their net interest mar-
gins compressed while the fragile economic
environment continues to provide limited
new lending opportunities. The low inter-
est rate environment is also putting pres-
sure on the business model sustainability of
banks which find overall net interest margins
squeezed, contributing to profitability pres-
sures. In some cases, earnings may not be
sufficient to cover rising bad loans, and the
asset quality reviews continue to add some
uncertainty, therefore leaving some question
marks over some institutions’ future profit-
ability and viability. Moreover, banks with a
return on equity (RoE) of less than 8 % contin-
ue to increase and represented 75 % of total
assets in the sample in December 2013 (up
from approximately 69 % in June 2013). More
specifically, banks with a RoE of less than 4 %
represented 39 % of total assets in December
2013, a perturbing situation that is recurrent
in the last few years (Figure 44).
Net interest margins continue under pres-
sure and on a downward trajectory (Fig-
ure 45). Net interest income has continued
to decrease since December 2011 and is less
than in 2009 (– 12 % and – 6 % in comparison
with December 2011 and December 2012 re-
spectively). The banks’ possible attempts to
increase lending rates and achieve and full
repricing of assets may prove not possible,
and even insufficient, to address the current
0 %
20 %
40 %
60 %
80 %
100 %
> 8 %
> 4 % – < 8 % < 4 %
Figure 44: RoE by bucket and percentage of banks’ total assets (
: EBA KRI data)