European banks delivered again. In line with our expectations, profitability in fourth-quarter 2024 remained elevated, while overall credit metrics were sound. 2024 is the second consecutive year in which European banks achieved, on average, double-digit return on equity. Previous examples of similar performances date back to before the global financial crisis, when capitalization levels were considerably lower and risk management and regulation were less evolved. Favorable credit fundamentals led to mainly positive rating actions in the banking sector over the past few months. They also improved market participants' perception of European banks, both in the equity and debt capital markets.

Banks Are Marching On

European banks' 2024 results demonstrated a continuation of key trends we had already observed in 2023. Revenues are holding up, spurred by still high net interest income and increasing fee income, with banks using hedging policies and active deposit management to protect their net interest income against lower policy rates. We maintain our expectation of a slight erosion of net interest income in 2025, even though the decrease should be gradual and limited. Banks are also taking steps to increase their fee income, which should partly offset lower net interest income.

Cost control is top of mind, with some banks even managing to more than offset inflationary effects and investment needs, thus reducing costs in nominal terms. Credit costs remain within the expected range for all banks, with no material macroeconomic surprise weighing on modelled provisions and a still limited increase in default trends. Thanks to overall solid profitability, banks confirmed their generous distribution targets, while maintaining solid capital and liquidity levels.

At a more granular level, several large European banks are still restructuring their operations, including UBS following the merger with Credit Suisse, and Societe Generale and HSBC with a number of divestments. Overall, however, benign credit conditions have provided tailwinds. Our stable outlook on these banks broadly reflects our view that they should manage to meet their strategic targets over the medium term. We expect the few banks that continue to lag peers in terms of profitability, for example Deutsche Bank, will catch up as their revenues increase and previous cost control decisions deliver efficiencies.

For several other large banks that benefit from excess capital and that have already met profitability targets, for example UniCredit and BNP Paribas, positive market sentiment fuels ambitions to invest and build scale. Recent merger and acquisition announcements have left our bank ratings mainly unaffected: Despite some execution risks, we consider that these announcements reflect banks' intention to grow and diversify revenues, rather than take excessive risks.

Several uncertainties continue to cloud the outlook for European banks. They are mainly related to external factors, including a potential deterioration of the economic environment in Europe, for instance due to increases in trade tariffs or an escalation of geopolitical risks. Geopolitical risks could also reduce business confidence and lead to a disorderly repricing of risks on financial markets, with ripple effects across banks and non-banks. Banks that are, in our view, most vulnerable to these downside risks include those with:

• Perceived business model challenges, including poor efficiency, a weak competitive position, or a major ongoing restructuring;
• A narrow lending focus, for example on commercial real estate (CRE) or small and midsize enterprises;
• Close links to a sovereign that faces fiscal consolidation challenges and potentially volatile funding conditions;
• A high reliance on market-making activities and an inadequate management of associated market or counterparty credit risks; and
• Weak operational resilience, including low defenses against cyber threats.

In the following, we provide our 10 key takeaways from the fourth-quarter 2024 earnings season.

1 – No Major Negative Surprises

European banks' financial performance was mainly in line with our base-case expectations, with the results from fourth-quarter 2024 broadly confirming trends that had been at play since 2023. We did not take any negative rating actions immediately after the publication of fourth-quarter earnings results.

Several U.K. banks with significant historical motor finance activities continued to build provisions in fourth-quarter, in anticipation of a review by the Financial Conduct Authority and an upcoming Supreme Court appeal hearing into motor finance commissions. In our view, these provisions are contained and represent a drag on earnings for affected banks, in line with our base case. That said, the upcoming Supreme Court judgment will remain an important overhanging risk for affected banks over the next few months. The outlook on all rated U.K. banks remains stable, indicating limited rating upside or downside in 2025.

Deutsche Bank's fourth-quarter result included material nonoperating costs that were mainly related to litigation and restructuring provisions and amounted to €1 billion. These weighed on reported profits, with the return on tangible equity dipping to 4.7%, from 7.4 % in 2024. We believe these nonoperating charges will support the bank's future earnings prospects. The stable outlook on the rating reflects our expectation that Deutsche Bank will maintain its disciplined strategic execution and strengthen its performance toward its 2025 targets.

French banks' reported results point to a gradual improvement of their profitability because of higher revenues, which is in line with our expectations. Importantly, French bank ratings remained unchanged after the revision of the outlook on the sovereign rating to negative from stable on Feb. 28, 2025. Although economic resilience in France is weakening, we consider that our assessments of economic and industry risks appropriately balance the strengths and challenges of France's banking sector. We also assess economic and industry risk trends for French banks as stable, considering banks' asset quality at the start of this year and their forward-looking provisions.

What's more, banks in Southern Europe continued to report relatively high performance and improved credit fundamentals. Since January 2025, and in line with recent trends, we have taken positive rating actions on banks in Cyprus--reflecting improved funding conditions--Greece, where the institutional framework has strengthened, and Portugal, where economic risks have eased.

Finally, we think the risks Swedish banks are exposed will remain unchanged as the economy recovers and the housing market improves. We now consider that Swedish house prices have started to recover from the previous correction.

2 – Net Interest Margins Withstand Declining Rates

With central banks gradually lowering policy rates since mid-2024, banks have taken various actions to protect their revenues. These actions largely paid off in the second half of 2024, with net interest income declining from the highs in 2023, albeit at a limited pace.

First, banks' net interest margins (NIMs) benefited from their hedging policies. A prime example of this trend are U.K. banks, whose structural hedging programs enabled them to increase their net interest margins. The fact that the Bank of England only cut rates twice in 2024, compared with four times in the case of the European Central Bank (ECB), also supported margins. Although eurozone banks follow a less structural and more tactical approach to interest rate hedging, we think they have repositioned their balance sheets in 2024 to protect earnings from expected interest rate declines.

Second, European banks are actively managing deposits to reduce funding costs. Continuously low competition for deposits will enable many banks to start lowering their deposit costs in the second half of this year. The deposit beta was 18% for eurozone banks between June and December 2024 (see chart 1). We expect it will increase in 2025 as central banks reduce the number of rate cuts and banks accelerate the pass-through of lower rates to their customers. The deposit beta measures the decline in average deposit costs across all deposit types--including overnight deposits, which are typically non-interest bearing--relative to the decline in policy rates.

Chart 1

That said, and despite banks' efforts to reduce funding costs, we maintain our view that most banks' margins will likely erode in 2025. Our expectation is based on two reasons: First, deposit margins are correlated with short-term rates. For instance, ING's net interest margins decreased after a decline in deposit margins to 1.00% in December 2024, from 1.18% in December 2023.

Second, lending margins will likely decline over time as the interest rate pass-through for new loans appears faster than on the deposit side. For instance, rates for new mortgage loans originated by eurozone banks decreased by almost 65 basis points in 2024, to 3.35% in December. For loans to non-financial corporations, the repricing was even faster, with rates declining by a full percentage point--corresponding to a beta of 100%--to 4.2% over the same period. That said, the effects from this downward repricing of lending rates will take time to feed through to banks' NIMs because banks originated a high amount of fixed-rate loans, of which only a fraction reprices every year.

3 – Loan Growth Makes A Timid Comeback

With gradually improving macroeconomic conditions, European banks reported an increase in loan demand early in 2024, which translated into gradually increasing lending volumes in the second half of the year (see chart 2). Even though business confidence remains fragile, given geopolitical and fiscal uncertainties, banks expect the rise in lending volumes will gather pace.

Chart 2

For example, Spanish banks' lending growth is accelerating after years of deleveraging. For instance, Caixabank reported a 27% increase in new lending volumes across all segments in 2024, compared with 2023. That said, negative outliers exist. These include the French mortgage market, where annual growth remained close to 0% in 2024, despite banks' efforts to rekindle this key market.

For 2025, we expect lending growth will accelerate across most geographies due to improving economic growth and decreasing rates. Higher volumes will be an important factor to offset the negative effects from lower rates on margins.

4 – Fee Income Is The Preferred Avenue Of Revenue Growth

Many banks focus on diversifying their revenue base by increasing the share of fee income. In fact, bank managers emphasized several initiatives in this domain during earnings calls. A prime example is BNP Paribas, whose investment and protection services (IPS) division was a key growth driver in 2024. The bank expects pre-tax profits in this division will rise one-third over 2025-2026, spurred by organic growth and the integration of two businesses it acquired in 2024 (Axa IM and HSBC's private banking unit in Germany). Over the long term, the bank expects the IPS division will account for one-quarter of its pre-tax profits, compared with 14% in 2024.

The quest to increase the fee income base is not new. Large Italian banks are particularly well placed in this regard as they derive about 60% of their revenues from fees. Intesa Sanpaolo's management expects its fee income from wealth management and insurance will increase by double digits in 2025, following a 9.4% rise in 2024. We tend to see such earnings diversification positively, as long as associated risks are well under control.

After years of restructuring, Europe's investment banks also recorded higher profitability, which supported groupwide earnings. Generally, banks have little appetite to allocate more capital to their investment banking divisions and are instead prioritizing products and clients that could increase returns. We note that European banks have stabilized their market shares at about 30% of global investment banking revenues over the past three years.

5 – The Cost Battle Continues

European banks remain focused on streamlining cost bases. Previous streamlining efforts are paying off for many banks and cost efficiency metrics are now very favorable. For instance, after three years of nominal cost decline--a considerable achievement, given high inflation--UniCredit reported a cost-to-income ratio of just 38% in 2024, which was among the best in Europe. Several other banks in Southern Europe now have cost efficiency metrics of 40%-50%, which constitutes a significant improvement, compared with past years.

For some banks, further cost efforts are on the horizon, especially in specific business lines: Societe Generale's French domestic operations continue to operate with high, albeit improving, cost efficiency metrics (cost to income at 77% in 2024), while UBS's U.S. wealth management activities continue to report relatively higher cost metrics than the rest of the group.

Streamlining the cost base is normal for major European banks. For instance, HSBC announced a new efficiency program that started in January 2025 and that aims to save $1.5 billion in costs. Barclays is another example. The bank achieved £1 billion in gross cost savings in 2024 and expects another £1 billion in savings over 2025-2026.

6 – Asset Quality: (Almost) Nothing To See Here

Rated European banks reported credit costs within their expected range in 2024. Thanks to an overall stable economy, banks did not need to increase their forward-looking provisioning, while default rates remained limited as borrowers benefited from lower interest rates. We expect these trends will continue in 2025, although we note that economic forecasts are subject to higher uncertainty than usual. Indeed, recent announcements on potential U.S. tariffs could deteriorate the macroeconomic outlook and feed through to banks' modelled losses. The extent of these effects is hard to measure but clouds the outlook for credit costs in 2025.

The CRE segment remains a meaningful pocket of credit risk for European banks. According to data by the European Banking Authority, nonperforming loan (NPL) ratios for CRE loans reached 4.3% for large EU banks as of Sept. 30, 2024. Accordingly, NPL ratios have largely remained stable since the end of 2023. This stability, however, conceals divergences between countries where bank defaults increased--Austria, Germany, and Luxembourg--and those where bank defaults decreased, namely Spain, Greece, and Italy.

For a few highly exposed banks, credit losses remained meaningful in 2024, although lower than in 2023. For example, Deutsche Pfandbriefbank (pbb), a rated European CRE monoliner with exposure mainly in Germany and the U.S., reported still elevated but lower stage 3 credit provision charges in 2024, compared with 2023. We expect CRE valuations and transaction volumes in the U.S. and Europe will near their cyclical lows, reducing the risk of further material deterioration in asset quality for pbb. What's more, the bank's continuing strong capitalization, resilient funding and liquidity profile, and strong gone concern loss absorption buffers support its credit profile. Against this background, we have revised the outlook on the 'BBB-' rating on pbb to stable from negative.

7 – Funding And Liquidity Remain Unaffected By Ongoing Quantitative Tightening And Macro Uncertainties

As central banks' quantitative tightening programs continue at a slow pace in the background, the effects on overall system liquidity have remained limited so far. Deposits from eurozone residents increased by 3% for eurozone banks in 2024 and a similarly stable deposit picture emerged in the U.K. (see chart 3). What's more, European banks continued to enjoy easy access to debt capital markets, with record-breaking net issuance levels (see chart 4).

Chart 3

Chart 4

These benign funding and liquidity conditions will likely prevail in 2025. We view positively that central banks seek to prepare banks for a less favorable liquidity environment, because we consider that the end of this long era of excess liquidity is prone to risks. We expect, however, central banks' insistence that banks should be ready to access standard refinancing operations to meet their liquidity needs will come with operational challenges.

8 – Generous Shareholder Distributions Are Set To Continue

Most European banks reported stable regulatory capital ratios at the end of 2024 and faced limited regulatory pressure on that front entering 2025. Although the revised Capital Requirement Regulation for EU banks came into force on Jan. 1, 2025, the short-term effect was largely muted by several legislative deviations and the very gradual phase-in of the output floor. Additionally, the delay in the implementation of the Fundamental Review of the Trading Book decided by the EU Commission provided further relief for banks with significant market operations.

In the U.K., policymakers announced an even more pronounced delay of the implementation of the overall Basel 3.1 package by one year. What's more, supervisors set broadly stable capital requirements for 2025 as they did not identify any material increase in banks' risk profiles.

Against this background, and considering the elevated profits that most banks reported, it is no surprise that European banks announced still elevated shareholder distributions in 2025. For most banks, the dividend payout ratio amounts to about 50%, with several banks announcing additional share buybacks that are subject to regulatory approval. We forecast that most rated European banks (69 out of the top 100) will have a risk-adjusted capital ratio above 10% by the end of 2025, which indicates a strong capitalization level. This is despite the planned shareholder distributions and supports our rating assessments for many banks.

9 – Positive Market Sentiment Endures

With their improved profitability and capital distributions, many European banks seem to have convinced equity investors that they are investable again. While the bulk of European banks operated with price-to-book ratios far below 1 for the better part of the past decade, equity valuations improved (see chart 5).

Chart 5

Currently, 29 of the 46 largest listed rated European banks exhibit price-to-book ratios at or above 1. The median price-to-book ratio for these banks almost doubled to 1.1 as of Feb. 28, 2025, from 0.6 as of Dec. 31, 2021. This improvement in market valuation strengthens banks' position on capital markets.

10 – Some Banks Are On The Front Foot

More confident in their financial standing and bolstered by positive market repricing, some European banks are leveling up their ambitions. Be it to diversify their product lines or build scale, inorganic growth and partnerships opportunities are back on the agenda. In the first few weeks of 2025, we saw several significant strategic announcements:

• BPCE, the French mutualist universal banking group, announced its intention to create a joint venture with the Italian insurer Generali in asset management. This highlights BPCE's ambition to strengthen its position in the fast-consolidating European asset management sector. The deal follows a string of announcements, with BNP Paribas acquiring Axa IM, and Banco BPM announcing its intention to fully acquire Anima.
• Consolidation plays continue. In Italy, the country's fifth-largest bank Monte dei Paschi (MPS, not rated) launched a voluntary takeover offer for Mediobanca. Second, BPER Banca announced a voluntary offer on Banca Popolare di Sondrio (BPS). We consider the consolidation in the Italian banking sector as inevitable as most banks will likely seek additional economies of scale and better revenue diversification to enhance their earning capacity, while increasingly investing in innovation. All recent announcements are consistent with this sector-wide trend. That said, the success of past mergers and acquisitions among banks in Italy has been mixed. In the case of BPER Banca and BPS, we think the merger, if effectively executed, could strengthen BPER Banca's market position and pave the way for a more effective and diversified group. In Cyprus, Alpha Bank announced its intention to acquire Astrobank, which would enhance Alpha Bank's scale and help maintain profitability momentum. Astrobank's assets would increase Alpha Bank's market share to 10% and consolidate its position as the third-largest player in Cyprus, behind Bank of Cyprus and Eurobank.

Finally, Commerzbank announced ambitious revised financial targets, including a targeted return on tangible equity of 15% for 2028. We think the attainment of these targets will depend substantially on maintaining strong momentum in fee-based businesses--likely supported by further acquisitions--and external factors that are beyond management's control, such as the level of interest rates. In our view, these ambitious targets should be interpreted as part of Commerzbank's strategy to ward off UniCredit's acquisition bid.

Related Research

• Various Rating Actions Taken On Four Portuguese Banks On Sovereign Upgrade And Easing Economic Risks, March 12, 2025
• Deutsche Pfandbriefbank Outlook Revised To Stable On Stabilizing Asset Quality; 'BBB-/A-3' Ratings Affirmed, March 11, 2025
• Banking Brief: Europe's Leaner Investment Banks Have Stabilized Their Market Share, March 4, 2025
• French Bank Ratings Unchanged After Sovereign Outlook Revision Amid Weakening Economic Resilience, March 3, 2025
• Alpha Bank's Astrobank Acquisition Will Consolidate Its Scale In Cyprus, Feb. 28, 2025
• Three Takeaways From U.K. Banks' Full-Year 2024 Results, Feb. 26, 2025
• Sweden's Economic Comeback Supports A Stable Banking Industry; BICRA Group Remains '2', Feb. 19, 2025
• Commerzbank Outlines Ambitious Financial Targets To Ward Off UniCredit, Feb. 13, 2025
• Banca Popolare di Sondrio Outlook Revised To Positive Following BPER Banca Offer; Ratings On Both Banks Affirmed, Feb. 13, 2025
• French Banks' Domestic Revenues Have Started To Recover As Expected, Feb. 10, 2025
• Bank of Cyprus Upgraded To 'BBB-' On Improved Funding Profile Of The Sector; Outlook Stable, Feb. 7, 2025
• Various Positive Rating Actions Taken On Greek Banks On Stronger Institutional Framework And Improving Capital Quality, Jan. 31, 2025
• Deutsche Bank's Fourth-Quarter Costs Pave The Way For Stronger 2025 Earnings, Jan. 30, 2025
• Monte dei Paschi's Offer For Mediobanca Is Further Evidence Of Banks' Strong M&A Appetite In Italy, Jan. 27, 2025
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• Banking Brief: French Banks Aim To Resume Housing Loan Origination, Oct. 21, 2024
• European Banks: Preparedness Is Key To Unlocking Central Bank Funding, Sept. 17, 2024
• European Banks Continue To Reap The Benefits Of Benign Credit Conditions, Sept. 3, 2024