ECB Annual Report on supervisory activities

Chart 2
Stable level of return on equity in 2016 due to lower
impairment charges offsetting the decline in operating
profits
(All items are weighted averages displayed as a percentage of equity)
15%
10%
5%
0%
-5%
-10%
Pre-impairment operating profits
Impairments
Other
Return on equity
2015 2016
The negative impact of decreasing revenues was partly
mitigated by lower operating expenses (-1%). The cost
reduction was particularly pronounced for staff
expenses (-1.4% year on year). In view of the
restructuring measures recently undertaken by several
euro area banks, the trend may continue in the coming
quarters.
Improving macroeconomic conditions had a positive
effect on impairment charges, which were lower than in
2015: impairments on loans and other financial assets
dropped from 5.5% of aggregate equity in the third
quarter of 2015 6 to 4.4% in the third quarter of 2016.
Most of the improvement was concentrated in a few
jurisdictions, while credit losses had already been at
historically low levels in some of the other countries.
Past experience suggests that banks tend to book
higher impairments in the fourth quarter, which could
affect profitability results over the full year.
Data for both years are shown as Q3 cumulated figures annualised.
Source: FINREP framework (101 significant institutions reporting IFRS data at the
highest level of consolidation).
Extraordinary sources of income supported banks’
profitability in 2016 (3.4% of aggregate equity in the
third quarter of 2016). However, one-off gains were lower than in 2015 and may not
be repeated in the coming quarters.
1.2 Implementing the SSM model of supervision
1.2.1 Refining the SSM SREP methodology
Owing to improvements in the
SREP methodology, the correlation
of banks’ risk profiles with their
capital requirements increased
76%
Correlation between
capital requirements and
risk profiles
Based on a common methodology for the largest banking groups in the euro area,
European banking supervision carried out the SREP for the second time in 2016.
Again, the objective was to promote a resilient banking system that is able to
sustainably finance the euro area economy. The harmonisation already achieved in
the 2015 supervisory cycle led to tangible results in this regard. Building on these
achievements, the SREP assessment has been enhanced. The enhancements are
reflected in an increased correlation of capital requirements with banks’ risk profiles
(from 68% after the SREP 2015 to 76% after the SREP 2016). At the same time, the
general approach of combining quantitative and qualitative elements through
constrained expert judgement has been maintained. In addition, the SREP
methodology has been further complemented in order to incorporate the results of
the 2016 EU-wide stress test.
6
The figure for the fourth quarter of 2015 was 5.8%.
<strong>ECB</strong> <strong>Annual</strong> <strong>Report</strong> on supervisory activities 2016 − Supervisory contribution to financial
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