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European Banks Find Stability and Gains as Interest Rates Rise, According to EBA Analysis

The European Banking Authority (EBA) has released its Q2 2023 Risk Dashboard (RDB), offering insights into the European Union and European Economic Area (EU/EEA) banking sector. The report highlights improved profitability and capital ratios, with a record-high average common equity tier 1 (CET1) ratio of 15.9%, showing a 20-basis point increase. The liquidity coverage ratio (LCR) stabilized at 159.9%, while the net stable funding ratio (NSFR) improved to 126.5%.

Despite these gains, economic and geopolitical uncertainties persist. The European Commission revised its economic outlook downward, adding to risks, and concerns are raised about China's economic growth and newly introduced banking taxes, increasing market uncertainty.
EU/EEA banks have embraced sustainability with the growing adoption of green bonds in their funding strategies. While economic growth has slowed and impacted loan growth, asset quality remains robust, although a few countries reported increased non-performing loans (NPLs), signaling potential future challenges.

Return on Equity (RoE) increased to 10.8%, primarily due to higher net interest income. Banks' net interest margin (NIM) continued to expand, albeit at a slower pace.

Operational risks, especially ICT and cyber threats, remain a key concern. The EBA's EuReCa data revealed 143 serious AML-related deficiencies in 57 institutions from June to August. Overall, the report underscores the resilience and adaptability of EU/EEA banks amid ongoing economic and financial complexities.

Summary of the key indicators:

  • CET1 ratio (fully loaded) on new time high of 15.9%
  • Only a small MREL shortfall on EU/EEA level, but wide dispersion among countries
  • Stable NPL ratio, but potential asset quality deterioration going forward
  • Banks’ return on equity (RoE) increased further
  • Net interest income rose by 20% on a yearly basis and by 2.5% on a quarterly basis
  • 143 serious AML/CFT deficiencies in 57 institutions were reported between June and August, as well as 50 “corrective measures".

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