Key drivers and developments in EU/EEA banks’ profitability  

EU/EEA banks reported a slightly increased RoE in 2024. The RoE increased from 10.4% in Q4 2023 to 10.5% Q4 2024. It reached its peak in between, at 11.1% in September 2024. The growth in RoE was due to a bigger increase in banks’ profits (approximately +9.1% YoY) than the rise in equity (ca. +6.6% YoY). As key contributors to the differences between 2023 and 2024 RoE, NII had a negative impact with a -0.92% YoY change (as share of equity), which corresponds to a decline in NII income of nearly 3% YoY. This was mainly due to central bank rate cuts (see Chapter on Macroeconomic environment and market sentiment). Other negative contributions included provisions and other factors such as taxes. All other contributors were positive, the most notable being the reduction in contributions to DGS and resolution funds (RF), after they had reached target levels. Data also shows that there has been a wide dispersion of RoE among countries, as well as its YoY development, with many countries even showing a YoY decline. Those differences in RoE levels and trends depend on, for example, a repricing of assets and liabilities amid a changing interest rate environment, but also on the composition of the revenue and cost drivers (Figure 56).

Although RoE remains elevated compared to the last decade, the CoE for EU/EEA banks also remains high. Approximately 60% of banks estimate their CoE to exceed 10%, likely due to uncertain macroeconomic conditions. However, the share of banks estimating their CoE to be more than 12% has decreased by nearly 10 percentage points to 19%, according to the RAQ survey. This decline may be attributed to technical factors, such as declining central bank rates (Figure 57).

Banks steer their revenue mix towards strengthening fees and commission income

The decline in NII came in parallel to pressure on NIMs, which saw its peak in March last year at 1.68%, but has declined since then, reaching 1.66% as of YE2024 (and as such being stable on a yearly basis). It still remains to be seen how the NII trends will play out in the end, depending on further margin trends that depend on interest rate moves, but also the impact from a steepening of the yield curves, as well as underlying volumes, such as new lending. Given the presumably downward dynamic in NII at least for now, banks increasingly rely on other sources of income, not least fee and trading income (including fair value result), whose shares of equity rose from 9.6% to 9.8% and 2.2% to 2.6%, respectively, on a yearly basis. The rise in fee income is, as such, a positive trend, as it shows that banks can manage their revenue streams. This was similarly reflected in the RAQ results, according to which more than 65% of banks consider net fee and commission income (NFCI) a high priority to increase profitability, considered now to be by far the most important profitability driver going forward (+12 pp. from last September). It remains to be seen how revenue streams might evolve going forward, with the general geopolitical and macroeconomic uncertainty making it even more challenging to provide any assumptions at this stage. Whereas a certain focus on fee income should normally help to address potentially declining NII, the former might also come under pressure if GDP growth deteriorates, for instance. The rise in trading income (including fair value result) is, in contrast, a more volatile position, which cannot be considered a sustainable revenue contributor. A country-by-country comparison shows that there are large differences in banks’ revenue composition. The data indicate that a higher NII contribution implies higher RoE, even though there does not seem to be an automatism in this relationship (Figure 58).

[*] Outliers can be partly explained by the specificities of the sample of banks for respective countries, which might for instance depend on the business models of some major banks operating outside of one country. For Lithuania, for example, the data are highly influenced by one bank’s specific business model.

There is likely to be limited scope for reducing costs in the future

EU/EEA banks’ costs increased by around 2% during 2024. On a yearly basis, they declined modestly in relative terms (as a share of equity) during 2024 by 35 bps. Provisions increased from 0.5% to 0.8% YoY and other costs (incl. taxes) rose from 2.1% to 2.3%. All other cost components were either relatively stable or declined. As a result, the average EU cost-to-income ratio (CIR) decreased YoY at EU/EEA level from 54.6% in December 2023 to 53.8% in December 2024. Moreover, EU/EEA banks’ cost of risk remained stable YoY (for further details related to asset quality, see Chapter on Asset quality trends). With cost levels widely dispersed among countries, there is similarly no direct link between, for example, the cost composition and banks’ profitability. It comes naturally, for instance, that banks with comparatively higher NII, which also benefit from comparatively low wage costs, and also do not have the burden of other elevated administrative expenses, benefit in the form of higher RoE (Figure 60).

[*] The divergence in the impairments as a share of equity, with some countries showing a higher ratio, is particularly affected by cross-border business, such as exposures to emerging markets, which also tend to have a positive associated impact in terms of higher NIMs, for instance.

RAQ results indicate that approximately two thirds of banks do not anticipate an increase in profitability over the next 6–12 months. The results show that, despite encountering challenges on the revenue side, particularly due to the deceleration of NII, banks are not prioritising cost savings as a strategy to enhance their profitability. This decision is presumably not least influenced by the rising necessity to invest in technological advancements and strengthen cybersecurity measures, while simultaneously improving automation and digitisation capabilities. These areas remain key targets for EU/EEA banks according to the RAQ. Furthermore, banks may face increasing demands for provisioning against credit losses if geopolitical tensions impact macroeconomic conditions. Additional challenges for profitability may also come from elevated competition from financial technology (FinTech) firms and the potential introduction of central bank digital currencies (CBDC). The latter may require ad hoc investment, which would at the same time presumably result in improvements in banks’ information and communication technology (ICT) systems. It might also affect banks’ NII and fee income, besides incurring related operational costs. Depending on the design choices, CBDCs might also offer new revenue streams (e.g. fee income)^[52].

Based on funding plan data, interest rates on loans increased in 2024, albeit at a slower pace compared to the significant rise in 2023. All segments experienced this dynamic except for credit institutions, where interest rates stagnated. This might not least be driven by a presumably high share of variable rate loans in this segment, as well as presumably rather short durations. Interest rates on loans are expected to decrease in 2025, falling below the rates of the past two years: notably for exposures to central banks by -220 bps, other financial corporates by -60 bps, as well as credit institutions and NFCs by -50 bps. Interest rates for household loans are projected to contract by 10 bps. On the liability side, interest rates on deposits in 2024 continued to rise across all segments (except for central banks), although at a slower rate than in 2023. This might be due to the previous rise in term deposits (see recent editions of the RAR). In 2025, interest rates on deposits for all segments are forecast to decrease, by 60 bps for credit institutions and general government, and by 70 bps for other financial corporates (Figure 61).

As a result of relatively parallel moves on the asset and liability side, the spread between interest rates for loans and deposits to/from households and NFCs remained relatively stable in 2024, with a slight EU/EEA average decrease of -10 bps to 2.5%. Most countries reported a decrease, with two thirds of Member States experiencing a tightening (e.g. Denmark, Ireland, Liechtenstein), while some countries reported a wider spread than last year (e.g. Estonia, Iceland, Italy). Also going forward, the client spreads are assumed to remain relatively stable, with minimal changes expected for most countries in 2025.