European banks have almost €100bn of their top-quality tier 1 capital tied up in supporting non-performing exposures (NPEs), according to new analysis by KPMG.
This is impacting both their financial performance and their contribution to the wider European economy.
KPMG came to this conclusion after analysing the results of the European Central Bank’s Asset Quality Review (AQR). The AQR was a financial health check of 130 banks in the euro area and KPMG itself carried out projects on behalf of regulators as part of the review.
The amount of common equity tier 1 capital that is required for European banks to support their non-performing exposures is estimated to be €96bn, which represents approximately 10% of total capital for the sector.
If this capital was freed up, it could support approximately €2 trillion of additional bank lending across Europe and increase their return on equity by 150 basis points.
Geographically, Cypriot, Greek and Irish banks were most affected, with each having an average of 46%, 35% and 21% respectively of capital tied up in supporting NPEs. In contrast, German and French banks fared well, with 7% and 5% respectively, due to their lower NPE stocks.
Stephen Smith, co-head of KPMG’s AQR taskforce, said: “While the AQR focused on the quality of the balance sheet, the income statement remains a cause for major concern, as our analysis suggests that the cost of supporting non-performing exposures is contributing to the destruction of shareholder value.”