The European Banking Authority (EBA) has released a risk report indicating an increase in risk costs, suggesting that financial institutions may have started to increase provisions due to worsening geopolitical conditions. While aggregate bank data for the first quarter is not provided, the report highlights a global profit growth of approximately 9.1% in 2024, with a return on equity (RoE) of 10.5% in the last three months, slightly higher than the 10.4% recorded in the same period the previous year.
This performance was achieved despite reductions in the European Central Bank’s (ECB) key rates, which mechanically reduce margins, as banks offset this with improved fee income and other market operations. Looking ahead to the next six to twelve months, banks believe that this aspect of their activity will provide most of the increase in profitability (more than 60% of the total, compared to around 50% previously), while interest income will represent a slightly smaller share (about 35%).
Last year, European institutions’ profitability peaked in the third quarter, with a RoE of 11.1%, with notable differences between banks in the 30 countries analyzed by the EBA (including those in the EU and the European Economic Area). In the last three months, Italy had a RoE of 14.7%, Spain 14.6%, and Romania, Hungary, and Cyprus surpassed 20%, significantly higher than Germany and France, both at 6.6%.
The EBA warns of heightened geopolitical tensions and potential consequences from the trade war initiated by Donald Trump, noting that “EU economies could be particularly affected given their openness and reliance on international trade flows.” The automotive, pharmaceutical, steel, mining, and agriculture sectors are identified as most vulnerable due to their significant export weight. Some banks have considerable exposure to these sectors and to the United States through sovereign debt.
Regarding exposure to the U.S., Germany holds the highest at over 10%, while France, the Netherlands, and Spain also have significant exposures (around 8%). The report’s authors note that geopolitical risks impact various aspects of banks’ operations, emphasizing the need to incorporate these risk considerations into business processes. Last year, banks increased assets by 3.2%, totaling 28.2 trillion euros. The share of non-performing loans slightly rose to 1.88% at year-end, which remains historically low. In volume terms, they amounted to 375 billion euros, 10 billion more than the previous year.
