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Abbreviations
9

Executive summary
10

Introduction
12

1. Macroeconomic environment and market sentiment
14

2. Asset side
18

2.1. Volume trends
18

2.2. Asset quality
22

3. Liability side
33

3.1. Market-based funding
33

3.2. Deposits
37

3.3. Central bank funding
37

4. Capital
41

5. Profitability
46

6. Operational risks: ICT-related risks and legal and consumer issues
55

6.1. ICT-related risks
55

6.2. Legal issues and reputational concern
56

7. Policy implications and measures
58

7.1. Resolution of legacy assets
58

7.2. Challenges around profitable and sustainable business models
58

7.3. Operational risk
59

Annex I — Samples
60

Annex II — Descriptive statistics from the EBA key risk indicators
65

Figure 1: Debt of general governments and private sector debt as a percentage of GDP (end of 2015) (6)
14

Figure 2: Stock index — STOXX® Europe 600 Banks share price index and weighted average of EU bank CDS spreads by market capitalisation (average December 2011= 100)
15

Figure 3: Market sentiment: positive and negative influences
16

Figure 4: Total asset and loan volumes (trillion EUR)
18

Figure 5: Expected further growth in banks’ overall balance sheet
19

Figure 6: Portfolios considered for growth and for deleverage
20

Figure 7: Portfolios considered for growth and for deleverage
21

Figure 8: Reasons for asset growth and deleverage
22

Figure 9: Non-performing loans ratio — 5th and 95th percentiles, interquartile range and median; numerator and denominator trends (December 2014  = 100)
23

Figure 10: Non-performing loans ratio — weighted average by country (21)
23

Figure 11: Ratios of non-performing loans and FBLs
24

Figure 12: A composite credit weakness ratio of non-performing and performing FBLs by country, Q2 2016
24

Figure 13: Non-performing loan ratios by sector, Q2 2016
25

Figure 14: Portfolios which are expected to improve or deteriorate in asset quality, Q2 2016
25

Figure 15: Total exposures of European banks (by country of origin) towards EU non-financial sectors (by sector of the counterparty)
26

Figure 16: EDF quartile distribution by sector (non-financial) at EU level compared to EU banks’ total exposures towards non-financial corporations by sector
27

Figure 17: Exposures in Europe towards non-financial sectors by banks’ country of origin (as a percentage of total) and sector EDF median
28

Figure 18: Coverage ratio — specific allowances for loans to total non-performing loans — 5th and 95th percentiles, interquartile range and median; numerator and denominator trends (December 2014  = 100)
29

Figure 19: Coverage ratio — specific allowances for loans to total non-performing loans — country dispersion — weighted average by country
29

Figure 20: Quadrant model showing a potential relationship between NPL and coverage ratio trends
30

Figure 21: NPL ratio versus coverage ratio (of NPLs) per country, Q2 2016 (* movements show the seven biggest changes from December 2014 (26)
31

Figure 22: Impediments to resolving non-performing loans
31

Figure 23: Summary of IFRS 9 quantitative estimations
32

Figure 24: Intentions to attain more funding via different funding instruments
34

Figure 25: Expectations on banks’ future funding channels
34

Figure 26: Bonds — aggregated debt maturity profile — 20-year breakout as of September 2015 (billion EUR)
35

Figure 27: Expectations on trading market liquidity
36

Figure 28: iTraxx financials (Europe, senior and subordinated, 5 years, bp)
36

Figure 29: Consolidated foreign claims of reporting European banks vis-à-vis selected countries’ banks, 2006 Q4 = 100
37

Figure 30: Loan-to-deposit ratio — weighted average over time and country dispersion
38

Figure 31: Euribor rates
38

Figure 32: Evolution of the ECB’s monetary policy and operations (MPO) and TLTRO volumes
39

Figure 33: Bank funding plans: expected changes in asset volumes (net changes)
40

Figure 34: Bank funding plans: expected changes in liability volumes (net changes)
40

Figure 35: Evolution of transitional vs fully loaded CET1 ratios
41

Figure 36: CET1 ratio — 5th and 95th percentiles, interquartile range and median; and by country
41

Figure 37: Evolution of CET1 capital and REA — numerator and denominator trends
42

Figure 38: CET1 main components — evolution and composition
42

Figure 39: REA main components — evolution and composition (39)
43

Figure 40: Evolution of the capital ratios
43

Figure 41: 5th and 95th percentiles, interquartile range and median of the tier 1 capital ratio (left) and total capital ratio (right)
44

Figure 42: Total cumulative issuance of AT1 CoCos by EU banks (billion EUR)
44

Figure 43: Planned issuance of subordinated instruments
45

Figure 44: Planned issuance of subordinated instruments
45

Figure 45: Evolution of the ratios of incomes and expenses compared to total operating income (TOI)
46

Figure 46: Decomposition of RoE (EU aggregate) — June 2016
47

Figure 47: NII to TOI: 5th and 95th percentiles, interquartile range and median; evolution (numerator and denominator) of NII compared to TOI (December 2014 = 100)
48

Figure 48: RoE by bucket and percentage of banks’ total assets
48

Figure 49: RoE and RoA — comparison
49

Figure 50: Banks’ CoE expectations
49

Figure 51: EU banks’ CoE based on the CAPM
50

Figure 52: RoE —long-term sustainable RoE in RAQ for banks and50th and 75th percentiles and comparison with CoE
50

Figure 53: EU banks’ CoE
51

Figure 54: RoE country dispersion as of June 2016 and total income and expense components per country
52

Figure 55: RoE breakdown: expenses compared to equity per country
52

Figure 56: RoE breakdown: income compared to equity per country
53

Figure 57: Evolution of profitability in the coming months and main drivers
54

Figure 58: Evolution of short-term earnings and main drivers
54

Figure 59: Operational risk as seen by banks
55

Figure 60: Main ICT-related risks as identified by supervisors
55

Figure 61: Expectations in respect of compensation, redress, litigation and similar payments
57