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--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
Banks should also "adapt their business models to new technological
challenges, as well as to address issues of overcapacity and high costs," he
"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."
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: firstname.lastname@example.org