Peer analysis: Predicting supervisory challenges

Peer analysis: Predicting supervisory challenges

How do banks across EU stand up against ECB priorities?

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Man and signs

The banking industry faces challenging times. It is a mature industry vulnerable to newer, sometimes unregulated entrants eager to take profitable segments of business. Simultaneously, the industry is more closely regulated than previously and the costs of being a bank are escalating. Considering these factors combined with a low interest rate environment and challenging economic environments, it is plain to see that the banking sector is clearly an industry under pressure that is being forced to innovate. 

One of the innovations made by the Single Supervisory Mechanism (SSM) is greater use of peer comparisons as a supervisory tool. This is driven by the ECB’s goal of ensuring a harmonized supervisory approach across Europe and facilitating the availability of data on larger numbers of banks to make this level of peer comparisons possible. Peer analysis makes for an excellent supervisory tool, and where the same or similar data is available to banks, it can also help banks to understand their place in the market and for preparing for conversations with their supervisor.

In January 2016, the European Central Bank (ECB) set out five high-level supervisory priorities for the year. In this report, we examine how banks in the five largest peer groups against these supervisory priorities using KPMG Peer Bank. The peer groups in the KPMG Peer Bank are based on the size of banks and their business model – similar to the ECB’s methodology for assigning peer groupings. Using these peer groups, we identified a few key metrics that reflect the supervisory priorities and consider which supervisory insights arise.

We consider three key areas in this report: profitability, non-performing loans (NPLs), and capital adequacy:

  • Profitability of banks is a concern. Credit institutions must continually prove to the ECB that their business model is sustainable and can withstand cyclical developments and structural changes. Our analysis demonstrates that many banks have work to do in order to meet the ECB’s metrics in this area.
  • Despite some deleveraging within the industry, the ECB acknowledges that NPLs are perhaps the most significant risk facing the banking sector in Europe. Our analysis showed that three of the five peer groups have average NPL levels above 10%. The ECB has publicly mentioned that 12% NPLs are a trigger point for more intensive supervision of a bank’s NPLs.
  • Related to the issue of capital adequacy, we look at the CET1 ratios of the peer groups and we also look at the percentage of total credit risk exposure accounted for by IRB models. The analysis indicated that the recent regulatory push to increase the level of high quality capital at banks has been successful, although the higher capital levels have also increased the cost base of the bank.Peer group analysis offers identifiable supervisory signals. Moreover, it is more interesting, and even more valuable to banks, when done on an individual bank basis. Where a bank finds itself as an outlier in a particular area, it should be ready to explain to the ECB why it is an outlier relative to its peers. Likewise, on a sector level, a bank should be able to justify why certain business model types may be showing more or less strength compared to other peer groups. 

KPMG Peer Bank

A benchmarking tool that brings peer-to-peer analysis on over 100 key ratios and indicators.

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