European Banking assesment
The European banking Authority (EBA) released its annual risk assessment of the European banking system which provides detailed information, in a comparable and accessible format, for 120 banks across 25 EEA / EU countries.
Overview of key EBA´s risk assessment report findings:
- Uncertainty on the economic outlook. For example, potential deterioration of economic outlook due to the pandemic or rising rates due to inflationary pressures.
- Loans under public guarantee schemes and under moratoria as an increasing share of these loans are being classified under stage 2 or as NPL.
- Real Estate. Accelerating house price increases along with banks’ recent focus on residential mortgage lending may become a source of vulnerability going forward. Also, commercial real estate (CREs) may pose even more challenges for the banks, as they remain vulnerable to structural changes in the post pandemic era.
- The average Return on Equity (RoE) stood at 7.4% as of June 2021 (from 0.4% a year before) is still below the estimated cost of equity (CoE). Only half of the banks responding that their RoE was above their estimated CoE (estimated >8% for three quarters of the respondents). Banks’ net operating income has not recovered to pre-pandemic levels.
- Despite the RoE improvement, structural challenges, such as low or negative interest rates and fintech and big tech competition remain.
- Poor profitability is also reflected in low market valuations, listed European banks are still trading below their book values (o.6x for European banks vs 1.6x for US banks).