E U R O P E A N B A N K I N G A U T H O R I T Y
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