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(In NOV 24 story EBA corrects capital figure to 12 percent from11.8 percent, paragraph 16)
By Steve Slater and Huw Jones
LONDON, Nov 24 (Reuters) - The scale of bad loans held bybanks in the European Union is "a major concern" and more thandouble the level in the United States, despite an improvement inrecent years, the EU's banking regulator said on Tuesday.
Non-performing loans (NPL) across Europe's major banksaveraged 5.6 percent at the end of June, down from 6.1 percentat the start of the year. But that compares with an average ofless than 3 percent in the United States and even lower in Asia,according to the European Banking Authority (EBA).
The total of NPLs across Europe is about 1 trillion euros($1.1 trillion), equivalent to the size of Spain's annual grossdomestic product (GDP) and 7.3 percent of the EU's GDP.
Tuesday's figures were the first time detailed data on NPLs,defined as a loan that is more than 90 days overdue or whereproblems are spotted earlier, have been released in Europe. TheEBA data covered 105 banks, spanning 20 EU countries and Norway.
Some 16.7 percent of loans at banks in Italy were designatedas NPLs, equivalent to 17.1 percent of the country's GDP.Spain's banks had an average NPL ratio of 7.1 percent, or 15.8percent of its GDP.
Banks in Cyprus fared even worse, with half of their loansclassified as bad, followed by Slovenia (28.4 percent), Ireland(21.5 percent) and Hungary (18.9 percent).
"Although gradually improving, quality of assets remains amajor concern in the EU and an impediment to new lending andbanks' profitability, particularly in countries already undereconomic stress," the EBA said.
Banks in Sweden had the lowest level of NPLs at an averageof 1.1 percent, followed by Norway (1.4 percent), Finland (1.7percent), Britain (2.9 percent), the Netherlands (2.9 percent)and Germany (3.4 percent).
The regulator said the scale of bad loans needed to betackled because banks typically lend more when their bad loansare lower and their capital is higher, so reducing NPLs shouldincrease lending to companies and help Europe's recovery.
The findings were part of a 'transparency exercise'conducted by the EBA this year, instead of a more intensive'stress test' of lenders, aimed at shining a light on areas ofweakness.
Analysts are expected to use the data to conduct their ownnumber-crunching on banks to spot potential vulnerabilities orwhat EBA calls imposing "market discipline" on lenders.
The regulator said European banks have shown improvement inalmost all other areas in recent years, including capital,leverage ratios and profitability.
TURNING A CORNER?
There are signs the banking sector is turning a corner aspolicymakers fret at how valuations of lenders in Europe lagthose of their U.S. rivals, which are stealing market share.
Profitability, as measured by return on regulatory capital,improved to an average 9.1 percent at the end of June from zeroat the end of 2013. But that is still below the more than 10percent banks believe is needed to cover the cost of capital ona sustainable basis.
Some countries lag badly, with the return on capital inGermany, the EU's biggest economy, at just 6.2 percent.
In other signs of improvement, the average core equity ratioof capital to risk-weighted assets rose to 12.8 percent, from9.7 percent at the end of 2011. The ratio dips to 12 percentwhen applying all the new capital requirement rules.
This is well above mandatory minimums for even the biggestbanks.
Much of the increase is due to fresh capital rather thancuts in lending, with total capital up by 232 billion eurossince 2011, equivalent to the GDP of Finland or Denmark.
The aggregate leverage ratio, a measure of capital to allassets on a non-risk weighted basis, was 4.9 percent, well abovethe current minimum of 3 percent that will be binding from 2018.
Global regulators are reviewing the minimum leverage ratio,with banks betting on 4 percent or higher in Britain, the UnitedStates and Switzerland.
($1 = 0.9398 euros) (Editing by Mark Potter)
