The EU banking sector remains resilient despite pockets of risk stemming from the change in interest rates

EBA has released its annual risk assessment of the EU banking system, accompanied by the 2023 EU-wide transparency exercise. The report indicates the resilience of the EU banking sector post the March banking turmoil, with high capitalization, a strong CET1 ratio at 16%, and underlying profitability supporting bank payouts. Despite elevated interest rates contributing to widening interest margins, there are potential risks due to subdued economic growth. Asset quality remains robust, but risks emerge from economic conditions and interest rates. Liquidity, while high, is normalizing from pandemic levels.
Market funding costs have risen with interest rates, but deposit rates have stayed relatively low. The report highlights key metrics like CET1 ratio, leverage ratio, liquidity coverage ratio, NPL ratio, and RoE to provide insights into the sector’s health.
Macroeconomic uncertainty, subdued growth, inflationary pressures, and geopolitical tensions contribute to an uncertain environment. Loan growth has slowed, influenced by increased interest rates and reduced risk appetite. The report notes potential risks in debt securities and real estate portfolios due to higher interest rates.
While asset quality remains robust with a steady NPL ratio of 1.8%, there are early warning signs, and NPL inflows exceeded outflows in H1 2023. Funding dynamics are shifting towards deposits, and LCR remain high but face potential pressure. Capital levels have reached new highs, with CET1 ratios at 16.0%, and banks continue to focus on building capital buffers.
Profitability has increased, but there are concerns about a potential slowdown, particularly as net interest income growth may flatten. Interest rate risk management is crucial, and banks are expected to focus on deposit-based funding. The report emphasizes the importance of resolvability, ICT and cyber risk management, and vigilant monitoring of operational risks.
The EU-wide transparency exercise provides detailed information for 123 banks across 26 countries, contributing to market discipline and transparency. While the EU banking sector displays resilience, vigilance and flexibility are needed given uncertainties in the macroeconomic environment and geopolitical landscape. The report concludes with policy recommendations, urging banks to manage ESG risks, validate interest rate risk parameters, and focus on resolvability and consumer protection.