EU banks at risk from bad loans, low profit

The greatest risks facing European Union banks are high levels of bad loans and lower profitability, the bloc's financial regulator said in a report Friday.

The European Banking Authority said that while EU-wide lenders had strengthened their capital buffers, technology-related risks were increasing amid lingering litigation concerns.

Presenting its ninth report on "risks and vulnerabilities in the EU banking sector", the EBA pointed to "high levels of non-performing loans (NPLs) and sustained low profitability" as being the main risks.

But it said that overall, the 131 banks had "further strengthened their capital position, allowing them to continue the process of repair" against a backdrop of high volatility in funding markets.

The regulator noted that the NPL ratio for the assessed banks as set against total loans had decreased overall to 5.4 percent in the second half of 2016 from 6.5 percent at the end of 2014. 

"While there are signs of potential improvements, asset quality is still weak compared to historical figures and other regions," the EBA said. 

"Material differences persist in asset quality across countries, with more than one third of EU jurisdictions showing NPL ratios above 10 percent." 

"Further gradual improvements in asset quality are expected by banks and market analysts" but will depend on how the risk posed by NPLs is addressed, the EBA added.

The EBA's figures showed that the level of bad loans in the Italian banks surveyed was at 16.4 percent, well above the European average.

The figure was below the level of Greece (47 percent) and Portugal (20 percent) but still well above the likes of Spain at six percent.

France was at four percent and Germany at 2.7 percent, confirming the overall good health of their banking systems.

Italy's third-biggest lender Monte dei Paschi di Siena (BMPS) was considered in a poor position, with a bad loans at 33.3 percent.

All eyes are now on Italy, where Prime Minister Matteo Renzi heads into a make-or-break constitutional referendum this weekend insisting everything is still to play for in his fight to hold on to power.

Economically, the biggest concern is that post-referendum political instability could scupper Italy's efforts to resolve a bad loans crisis in the banking sector and spark turmoil across the eurozone.

Italian banking stocks have halved in value this year and government borrowing costs have edged higher in the run-up to the vote.

The EBA recommended tackling the problem of bad debts by mobilising the regulators, implementing structural reforms and developing a secondary market that could ease the sale of particular loan portfolios.