Resilience of European Banks

The European Banking Authority (EBA) published a report with a preliminary assessment of the impact of Covid-19 on the EU banking sector. 

Main highlights from the EBA´s report:

• The banks "entered the health crisis with strong capital and liquidity buffers and managed the pressure on operational capacities activating their contingency plans": 
  • The common equity tier 1 (CET1) was near 15% at the end of 2019 (from 9% in 2009) and banks’ liquidity coverage ratios were on average close to 150%, well above the regulatory minimum prior to the pandemic
  • Contingency plans have allowed them to keep their core functions broadly unaffected despite increased pressure from remote working, branches temporarily closed, exponential growth of the use of digital channels, handling of large volumes of applications for debt moratoria and guaranteed loans…
     
• "The crisis is expected to affect asset quality and, thus, profitability of banks going forward." In this regard “the increase in credit risk could have an average impact of around –380 bps in CET1, without considering the potential beneficial effect of loan payment moratoria and guarantees.” According to the EBA profitability will continue under pressure as “many banks do not earn their cost of equity”, and irrespective of the crisis some vulnerabilities persist: low level of interest rates, overcapacity of the sector and level of NPLs in some countries above pre-financial crisis levels. EU banks RoE is 5.9% at Q4 2019, below the 9.5% of US Banks.
  
  
• The report concludes that capital buffer accumulated by banks during last years along with the capital relief provided by regulators “should allow banks to withstand the potential credit risk losses derived from a sensitivity analysis based on the 2018 stress test”, which could amount up to 3.8% of RWAs under the more sever credit shock.