EBA Report Projects Assets To Grow 3.9% By 2019, Warns On NPLs

--NPLs could hold back new lending

--"Modest increase" in asset encumbrance across EU

By Tara Oakes

     BRUSSELS (MNI) - Assets held by European Union banks are projected to grow

by an average of 3.9% between 2016 and 2019, but NPLs will continue to be a drag

on new lending if not addressed, the European Banking Authority (EBA) said

Monday.

     In its annual report on funding plans, the EBA's survey of 155 banks found

that asset growth is set to be driven by loans to households and non-financial

corporates up until year end 2019.

     EBA's Director of Oversight, Piers Haben, said in a video accompanying the

report that the general outlook was optimistic and highlighted three key

features for the projected growth in lending.

     "The first is that ordinary deposits are expected to grow by 9.4%. The

second is that there should be a modest drop in reliance on that official sector

-- central bank funding up to 2019," Haben said.

     "Thirdly is an expected increase in market-based funding, which may reflect

both increased confidence, but also a requirement to ensure that banks have

funds for both good times and bad, including orderly resolution," he added.

     "[T]he plans suggest that the share of covered bonds as a source of asset

encumbrance will continue its rising trend," the EBA added in a statement.

Client deposits are expected to remain as the main funding component across the

bloc, standing at about 50% of the funding mix.

     But, the EBA warned, forecasts from those surveyed would require "careful

monitoring" on their projections for reliance on interest income to improve

profitability.

     "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," the group said.

     Banks are anticipating detailed MREL requirements by 2018-9, the report

added.

     TACKLING NPLS

     The problem of NPLs also needs to be addressed to avoid becoming a drag on

lending, the report warns.

     "High NPL levels combined with more thinly capitalised banks look set to be

a drag on new lending unless addressed. Small and medium-sized banks will

require particularly careful monitoring if they are to retain unfettered access

to capital markets and investors," it reads.

     Figures from the report show that the correlation between NPL ratio and

loan growth forecast hits less capitalised banks' lending projections hardest.

     "The analysis shows that there is a strong negative correlation between NPL

ratio (2016) and banks' client loan growth forecast (2017), suggesting that

banks with higher NPL ratios forecast lower loan growth. The correlation

coefficient is -0.40 and significant at a 5% level of significance," the report

reads.

     DISPARITIES

     Haben also acknowledged that the headline figure of 3.9% blurred clear

discrepancies across the EU.

     "[T]his average hides many differences between countries," he said.

     Greece, for example, trails at -11.4% projected total asset growth  in

2017, compared to +7.4% for table-topping Slovakia. Forecasts for Greece improve

in coming years, however, with total asset growth rising to -3.5% in 2018 and

+2.8% in 2019.

     UK total asset growth is also set to rise, but less dramatically. The EBA

forecast an increase from -1.3% in 2017 to -0.8% in 2018 and +0.9% in 2019.

     ASSET ENCUMBRANCE

     A separate, retrospective annual report on asset encumbrance released by

the EBA Monday showed a "slight increase" over the five quarters to end 2016.

     "The ratio of encumbered assets and collateral received relative to the

total assets and collateral received available for encumbrance,3 measured as a

weighted average across the sample, was 26.6% in December 2016, compared with

25.4% for December 2015 and 25.1% for December 2014," the report says.

     This too differs widely between EU countries and institutions. A high level

of encumbrance remains in countries with already-established covered bonds

markets, such as Denmark and Sweden, the EBA found.

     Countries who were hit hardest by the debt crisis, such as Greece and

Cyprus, also measured high encumbrance levels, the report found - but there were

indications that that could be changing.

     "Some countries that were more severely affected by the sovereign debt

crisis have high encumbrance levels but showed a decrease in volume of

encumbrance compared with last year (from 22% to 7% in Cyprus, from 47% to 43%

in Greece), and in particular a decreased dependence on the use of central bank

funding, which could indicate a general improvement in the funding conditions in

these countries," the report reads.

     "In particular, Greece and Cyprus decreased their level of encumbrance from

central bank funding from about 90% in December 2015 to about 70% in December

2016," it adds.

     The UK's high share of repurchase agreement financing and collateral

requirements for over-the counter (OTC) derivatives meant they also measured

high levels of encumbrance, the report found.

     The EU-wide "modest increase" in the level of asset encumbrance was not "an

immediate cause for concern".

     "[T]his change is in line with similar changes observed in the sample over

time," the report concluded.

--MNI Brussels Bureau; +44 203-865-3851; email: tara.oakes@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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