In November of 2015, the European Banking Authority (“EBA”) published the outcome of its 2015 EU-wide transparency exercise and provided detailed bank-by-bank data on capital positions, risk exposure amounts and asset quality on 105 banks from 21 countries of the European Economic Area (“EEA”). The EBA is committed to enhancing transparency in the EU Banking Sector, and aims to promote greater understanding of capital positions and exposures of the Sector.
The Director of Oversight at the EBA, Piers Haben, explained that this is the EBA’s fifth annual release of bank by bank data, and that the transparency exercise demonstrates an increasing resilience in the EU Banking Sector. He noted that while capital levels have strengthened, EU banks will need to continue addressing the level of non-performing loans which remain a burden on profitability. In addition to this, Haben pointed out that the breadth of individual bank data, and the quality of the interactive tools available, illustrate the EBA’s efforts to enhance transparency, foster market discipline and reinforce investors’ confidence.
For the first time, the 2015 transparency exercise is based on existing supervisory reporting data submitted to the EBA on a quarterly basis insofar as is possible. This is intended to reduce the burden on banks by avoiding ad hoc data collection. It also ensures harmonized and fully comparable figures across the EU.
The report shows that the strengthened capital positions shown by EU banks are mainly a result of raising additional equity and retaining earnings. Banks have been able to gradually increase lending into the real economy. Lending in the first half of 2015 increased towards retail and corporates. This increase in lending was accompanied by a very gradual improvement of asset quality. Despite this, as stated by Piers Haben the levels of non-performing exposures in EU banks remain a concern and are potentially an impediment to lending growth and profitability. Due to larger net income being derived from trading activities and lower impairments, and partially explained by the seasonality of impairments, EU banks’ aggregate return on equity improved during the first half of 2015: from 4.65% Return on Regulatory Capital as of December 2014 to 9.1% as of June 2015. However, by historical standards and relative to banks’ estimated Cost of Equity, profitability remains weak.
The data released in the report shows a continued existence of home bias when investing in sovereign debt. However, this has been gradually in decline as banks reported an increase in their holdings of non-domestic sovereign debts in June 2015.