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Top 1000 World Banks – Asset quality still proving a headache for Europe

As has been the case in most recent rankings, European lenders have continued to wrestle with asset quality issues.
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As has been the case in recent years, European lenders are wrestling with asset quality in this year’s Top 1000 World Banks ranking. Non-performing loans (NPLs) rose in Greece, while losses for the banks on the continent remained large. It was not all bad news throughout Europe, however, as Italian lenders managed to reduce their stocks of soured loans and are no longer responsible for some of the largest losses in the ranking.

NPLs continued their upward march at the 'big four' Greek institutions – Piraeus Bank Group, Alphabank, Eurobank Ergasias and National Bank of Greece. However, the highest spike in the country came from the much smaller Attica Bank, where NPLs ballooned by 23 percentage points, to 50.9%.

At the same time in Cyprus, where the crisis is a more distant memory, banks are starting to offload bad loans. The largest lender in the country, Bank of Cyprus, saw its NPLs dwindle 13 percentage points to 50% in 2015. It was the same story at Hellenic Bank, where the ratio dropped by 7.1 percentage points to 49.5%. To a lesser degree, this was also the case in Italy, where Unipol Banca, which is hampered by bad loans more than any other local bank, saw a drop of 0.58 percentage points to 24.32%.

There is also an indication that NPLs are becoming more of a global issue. Two Indian banks, Indian Overseas Bank and UCO Bank, are now featured alongside European lenders as their NPLs grew to 17.4% and 15.43%, respectively.

Italian lenders used to loom large in the table charting the worst global performances – in 2014’s ranking, UniCredit posted a loss of $22.03bn and a year later Banca Monte dei Paschi di Siena lost $9.33bn – but they are noticeably absent this year. Instead, the largest loss was recorded by Deutsche Bank with $6.63bn, followed by the 'big four' banks in Greece. The only Italian bank in the table is Banca Popolare di Vicenza, which lost $2.06bn in 2015. This, combined with a low capitalisation of 8.13%, led to it being the second least profitable bank in the ranking by return on capital (ROC).

The profitability picture looks different from an ROC perspective. While Greek banks are still among the ranking’s least profitable institutions by that measure, they do not fare the worst. Instead, International Bank of Azerbaijan is the largest loser globally, having earned a return of -146.6% in 2015. It is followed by Banca Popolare di Vincenza, which is not far behind with a return of -114.31%. Another prominent loss-making institution is Austria’s Hypo Alpe Adria, which had to spin off part of its balance sheet into 'bad bank' Heta Asset Resolution in 2014 and showed ROC of -89.92% in 2015.

Low Bank of International Settlements (BIS) capital ratios are one category not dominated by European institutions, but by Iranian and Japanese lenders: Banco Popolare Vincenza is the lone European presence among the top 10 least capitalised banks. In Iran, low capitalisation is the business model of the entire banking sector. In 2015, the sector reported capital ratio of 6.8%. To a lesser degree, this is also the case in Japan, where low capitalisation is often an integral part of the business model of the smaller lenders. Michinoku Bank and Higashi Nippon Bank share BIS capital ratios of 8.31% and they respectively rank 88th and 72nd in the Japan country rankings.

As often is the case, the list of most leveraged banks is full of specialised institutions, where asset volatility is minimal and low capitalisation is not necessarily risky. The prime example is Dutch Nederlandse Waterschapsbank, which has the lowest capitalisation in this year’s ranking at 1.75% and which provides financial services to the public sector. Other lenders, such as AXA Bank Europe, which has capitalisation of 3.17%, complement the parent group, in this case insurance services. Additionally, the list includes specialised savings banks such as Spain’s Banco Cooperativo Espanol.

Asset quality

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