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Executive summary

The EU banking sector continues to strug-

gle with high levels of non-performing

loans (NPLs), low profitability and efforts

to restore confidence, notwithstanding the

steady strengthening of the capital base.

Nonetheless, modest asset growth contin-

ues, also supported by lower-risk traditional


External events saw heightened volatility

in market sentiment towards banks’ fund-

ing in the first three quarters of 2016.


funding costs have been kept low by accom-

modative monetary policy stances, including

central banks’ asset purchase programmes,

overall issuance volumes of unsecured debt

were reduced in the first three quarters of

2016 compared to 2015. Issuance concen-

trated on banks with a strong market per-

ception. Volume reductions of subordinated

debt issued were particularly pronounced.

Volatility has also seen increased fluctua-

tions in spreads for unsecured debt in 2016.

Going forward, banks will also have to take

into account in their funding plans the need to

meet the requirements of the global standard

on total loss absorbing capacity (TLAC) and

the bank recovery and resolution Directive


Deposit volumes have been flat in 2016.


and partially negative interest rates have not,

yet, had a negative impact on deposit vol-

umes, but previous years’ growth has stalled.

Funding plans indicate banks’ optimism

in respect of asset and liability growth.


an aggregated basis, funding plans from

banks indicate they plan to increase lending

to households and non-financial corporates

(NFCs) by about 1 % to up to 5 % p.a. in 2016

and the two following years. On the liability

side, deposits from households and NFCs,

as well as market funding, are expected to

increase for both long-term secured and

unsecured funding. Expected increases are

in a range between 1 % and 5 % p.a. in the

years 2016, 2017 and 2018. Seen in aggregate,

it seems difficult for all banks to increase

these sources of funding, especially in light

of this year’s static deposit growth and vola-

tile funding markets with several set-backs

of issuance volumes.

The strengthening of European banks sol-

vency, initiated in 2011, has continued.


common equity tier 1 (CET1) ratio, computed

on a transitional basis, increased by 80 basis

points (bp) between June 2015 and June 2016,

to 13.6 %. The fully loaded CET1 ratio was

12.1 % in June 2015 and 13.2 % in June this

year. The continuous increase in common eq-

uity is the main driver for the improvement in

banks’ capital position. Supervisory restric-

tions on dividends have also boosted retained

earnings, despite the low profitability envi-

ronment. A downward trend in risk exposure

amounts (REA) was led by a fall in credit risk

as banks shifted towards lower risk weights,

despite a slight increase in total assets in the

same period. A fall in market risk also con-

tributed to the decline.

Additional tier 1 (AT1) capital reached 1.2


of REA in aggregate as of June 2016, which

shows that banks still have room to further

adjust their capital structure.

Only 18 % of

the banks in the EBA’s sample have AT1 equal

to or above the maximum amount eligible of

1.5 % for the computation of the minimum tier

1 capital ratio, whilst 75 % hold AT1 below

1 %. Conversely, 48 % hold tier 2 (T2) capi-

tal already above 2 %, which is the maximum

amount eligible for the computation of the

minimum total capital ratio, while only 17 %

report a share of zero. Investor demand is

somewhat subdued, despite the attractive-

ness of higher yields, as challenging market

conditions and some initial concerns about

the regulatory treatment and trigger for AT1

instruments weighed on the sentiment. Av-

erage yields for AT1 instruments were sub-

stantially higher in 2016 compared to 2015.

A range of different terms and features ob-

served in AT1 instruments issued in Europe

and a lack of comparability may additionally

have negatively affected investor interest in

these instruments.