European banks reported strong capital and liquidity ratios at the end of 2021, according to the European Banking Authority’s (EBA) Risk Dashboard for the fourth quarter, which is is based on a sample of risk indicators from 161 European banks.
The average common equity Tier 1 (CET1) ratio was 15.4%, unchanged from the previous quarter due to a small increase in capital being met with an increase in risk-weighted assets. The liquidity coverage ratio was also unchanged, keeping its near-historic high of 174.7%, showing there is abundant liquidity at European banks.
Asset quality improved with banks reporting a non-performing loan (NPL) ratio of 2%, down from 2.1% in the previous quarter. The decline was due to a 7% decrease in NPLs, worth €391bn.
The first-round effect of Russia’s invasion of Ukraine on the asset quality of European banks is likely to be limited, according to the EBA. However, second-round effects such as rising energy prices and supply chain bottlenecks may have a bigger impact. Further impacts on asset quality could come from regions that are still being affected by Covid-19 variants.
Meanwhile, return on equity of Europe’s banks stood at 7.3%, down from 7.7% in the previous quarter. Nevertheless, profitability is stabilising at levels higher than in the pre-pandemic period.