EBA’s reports show that banks’ funding plans paint an optimistic outlook for growth whilst NPLs remain a drag on EU banks’ new lending

EBA’s reports show that banks’ funding plans paint an optimistic outlook for growth whilst NPLs remain a drag on EU banks’ new lending The European Banking Authority (EBA) published today two reports on EU banks’ funding plans and asset encumbrance respectively. The reports aim to provide important information for EU supervisors to assess the sustainability of banks’ main sources of funding. The results of the assessment show that banks plan to increase their lending and to expand deposits as well as market based funding.

Forecasted loan growth to be funded by client deposits and issuance of long term debt

The EBA asked 155 banks for their plans for funding over 3 years to 2019. These plans show that, on average, total assets are projected to grow by 3.9% between 2016 and 2019. The main drivers for asset growth are loans to households and to non-financial corporates. Further analysis suggests that high NPL levels combined with more thinly capitalised banks could be a drag on new lending unless addressed.

Client deposits remain the main component in EU banks’ funding mix with a share of more than 50%. Banks forecast an expansion of deposits, which will require careful monitoring, at both an individual and system level. Planned issuances of debt securities in 2017 also looks set to increase in 2018 and 2019. In addition, the plans suggest that the share of covered bonds as a source of asset encumbrance will continue its rising trend. The outlook for funding plans should be seen in the context of the need to issue further minimum requirements for eligible liabilities (MREL) and the wind down of central banks’ funding support measures. Amid such trends, banks’ forecasted reliance on interest income to improve profitability will require careful monitoring.

Asset encumbrance increased slightly in 2016

The asset encumbrance report, which is backward looking, shows that in December 2016, the overall weighted average encumbrance ratio stood at 26.6% against 25.4% in December 2015. However, the report highlights a wide dispersion across institutions and countries, which is consistent with what was observed in the previous report. Besides covered bonds, the main sources of asset encumbrance are repos and over-the-counter derivatives. Some of the countries particularly affected by the sovereign debt crisis showed a decreased dependence towards the use of central bank funding, which could reflect a general improvement of the funding situation in these countries.