Banks in the European Union hold record high levels of capital backed by improving levels of liquidity, but there are early signs that loans, such as those linked to real estate, have come under pressure, the bloc's banking watchdog said on Thursday.

The European Banking Authority (EBA) said in its "risk dashboard" for the final quarter of 2023 that credit quality indicators point to some potential deterioration, albeit from still very low levels.

"EU banks are robust, but signs of credit quality deterioration are becoming apparent," EBA said in a statement.

This has been expected to some extent given the cost of living crisis in Europe due to higher energy costs and higher interest rates. Real estate sectors in EU member countries like Germany and Sweden have come under pressure.

The so-called non-performing "Stage 2" loan ratio (NPL), a benchmark of loans coming under stress as borrowers struggle to make repayments, grew to 9.6% in the final quarter of last year from 9.2% in the third quarter, EBA said.

The NPL ratio for loans collateralised by commercial real estate increased marginally to 4.3%.

EU banks' capitalisation stands at record levels of 15.9% on a weighted average basis for common equity Tier 1. Liquidity levels are "comfortably" above the minimum, EBA said.

"Financial market conditions during the first months of 2024 were benign, with high level of debt issuances from banks," the watchdog said.

Profitability remained high in 2023 as banks benefited from higher interest rates, though the share of banks with a return on equity above 10% has decreased to 45% from 60%, EBA said. (Reporting by Huw Jones; Editing by Jan Harvey)