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EBA's latest risk assessment finds improved asset quality, stable profitability

The European Banking Authority's latest risk assessment of the European banking sector found that banks' asset quality improved, profitability stayed stable without many changes, solvency ratios increased and operational risks grew.

European banks' average nonperforming loans, or NPLs, ratio fell to 3.6% in June from 4.4% a year ago, mainly due to NPL sales. However, vulnerabilities still exist due to political tension and downside risks to economic growth.

Profitability has virtually stayed the same as it was in 2017 with an average return on equity of 7.2% as of June 2018 compared to 7.1% a year before. European banks' net income steadily declined in spite of growth in lending volumes, but reductions in impairments along with increases in net fees and commissions have been beneficial to their profitability.

Solvency ratios increased despite a rise in risk-weighted assets. EU lenders' common equity Tier 1 ratios climbed to 14.5% from 14.3% on a transitional basis and to 14.3% from 14% on a fully loaded basis since June 2017.

Meanwhile, cyber risks and data security are the main drivers that have caused operational risk to rise.

The EBA said the global economy is still at risk due to growing geopolitical tensions and uncertainty around financial and economic conditions in emerging-market economies. It added that banks need to be prepared for any adverse situations that could impact funding, asset quality and profitability.