MNI: ECB Draghi: EZ Banks Still Face Many Challenges in 2018

--Supervisors concerned about lack of profitability, NPLs

By Christian Vits

     FRANKFURT (MNI) - Banks in the Eurozone still have to work on their

business models and particularly must get rid of their non-performing loans,

European Central Bank President Mario Draghi said Monday.

     Challenges include "cleaning up their balance sheets, reducing legacy

exposures largely originating from the financial crisis, such as certain

non-marketable financial products, and from the ensuing Great Recession, such as

non-performing loans," Draghi wrote in the ECB's Annual Report on supervisory

activities.

     Banks should also "adapt their business models to new technological

challenges, as well as to address issues of overcapacity and high costs," he

added.

     --PROFITABILITY CHALLENGE

     "Profitability is the number one challenge for banks in the euro area,"

Daniele Nouy, Chair of the Supervisory Board of the ECB, wrote in the same

report. "A number of them still don't earn their cost of capital, and in the

long run that's an unsustainable position," she underlined.

     Supervisors are concerned about the lack of profitability as unprofitable

banks cannot support economic growth and build up capital buffers, Nouy said.

They should also think about diversifying their sources of income, for instance

through new technologies.

     "For large banks in the euro area, more than half of operating income

consists of net interest income," Nouy stressed. "Given the record-low interest

rates, this is something to work on."

     --NON-PERFORMING LOANS

     Banks could, for instance, try to increase their fee and commission income.

In general, "the European banking sector needs to further consolidate," she

added. The fact that banks can now fail in an orderly fashion "should, above

all, shift their focus towards sustainability. Public bailouts should be a thing

of the past."

     Cost-cutting measures are not in any case a good idea, Nouy noted. Reducing

staff in areas such as risk management or saving on IT systems is not a clever

way forward, she said.

     Reducing non-performing loans is paramount as they are a drag on profits.

Nouy highlighted that NPLs since early 2015 have fallen by about E200 billion.

"This is encouraging, but it's not enough," she concluded.

     Looking across the euro area, the NPL ratio continues to differ

significantly from country to country, the report showed. In the second quarter

of 2017, Greek and Cypriot significant institutions (SIs) had the highest NPL

ratios (with country-weighted averages standing at 46.6% and 34.0%

respectively). With 18.1%, Portuguese SIs had the third highest NPL ratio.

     Looking at the trend, the NPL ratio decreased significantly year-on-year

for SIs in Cyprus (-6.3 percentage points), Ireland (-5.6 pp), Italy (-4.4 pp)

and Slovenia (-3.2 pp).

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

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