Coverage: weekly note · Information to 14 April 2025
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TGB Weekly Research Note · 14 April 2025
EU/EEA banks earned a 10.5% return on equity in 2024, barely above 2023, and the ECB expects profitability to decline only slightly for most banks.
The desk view
The European Banking Authority (EBA) put EU/EEA banks' return on equity (RoE) at 10.5% for 2024, an increase of only 10bp on 2023. The ECB's figure for the banks it supervises directly was 9.54% in the fourth quarter, against 9.32% a year earlier. Margins have slipped from their March 2024 peak, while fee income grew 9.6% year on year. In November the ECB described profitability as set to moderate from multi-year highs and expected it to decline slightly for most banks while remaining well above the levels of the last decade. Our reading is that 2024 marks a plateau, and that the pace of decline depends on how far fees and cost control offset lower rates.
Returns plateaued close to the top of the range
On the EBA's Risk Dashboard, the weighted-average RoE of the largest EU/EEA banks was 10.5% at December 2024, against 10.4% at December 2023 and 3.5% at December 2014. The EBA's autumn risk assessment had described RoE of 10.9% in June 2024 as very close to the highest levels reported by the sector. The ECB's series for significant institutions shows 9.54% in the fourth quarter of 2024, down from 10.09% in the previous quarter. The ECB said profitability had remained historically high in 2024 in aggregate terms, although most banks had seen it decline slightly as net interest income weakened.
The aggregate hides a wide spread. At December 2024 the 25th percentile of the EBA sample stood at 7.1% and the 75th at 15.0%.
EU/EEA banks' return on equity, year-end, %
Source: European Banking Authority, EBA Risk Dashboard, Q4 2024 (data as of December 2024), 21 March 2025.
Fees and costs took over from interest income
The EBA's net interest margin was 1.66% at December 2024, the same as a year earlier and below its 1.69% peak in March 2024. The ECB said the margin of the banks it supervises reached 1.60% in the fourth quarter of 2023 and has remained quite stable since.
Between December 2023 and December 2024, net interest income fell from 62.5% to 60.3% of operating income, while fees rose from 27.4% to 28.1%. The cost-to-income ratio fell from 55.6% to 53.8%, and the cost of risk was 0.49%, against 0.48% a year earlier.
EU/EEA banks, key indicators
| Indicator | Dec 2023 | Dec 2024 |
|---|---|---|
| Return on equity | 10.4% | 10.5% |
| Net interest margin | 1.66% | 1.66% |
| Net interest income, % of operating income | 62.5% | 60.3% |
| Fees, % of operating income | 27.4% | 28.1% |
| Cost-to-income ratio | 55.6% | 53.8% |
| Cost of risk | 0.48% | 0.49% |
| CET1 ratio, fully loaded | 16.1% | 16.0% |
Source: European Banking Authority, EBA Risk Dashboard, Q4 2024 (data as of December 2024), 21 March 2025.
Supervisors see a slight decline, not a reversal
In November the ECB judged that net interest income had peaked, that margins were probably past their peak and that the decline in net interest income was set to continue amid margin compression. The EBA expected pressure on net interest income to intensify with rate cuts, and found banks prioritising fees and cost reduction. In its questionnaire, 60% of banks had a bleak outlook on profitability growth.
On 6 March 2025 the ECB lowered its key rates by 25bp, taking the deposit facility rate to 2.50% from 12 March. The ECB had expected the decline in net interest income to remain contained because markets saw rates staying well above pre-hiking-cycle levels, and said cost control had cushioned the impact on returns. It also expected the decline to fall mostly on the banks that gained most from the hiking cycle, narrowing dispersion.
The EBA noted that RoE on average tends to be below banks' cost of equity, with nearly 70% of banks reporting a cost of equity above 10%. With target payout ratios, the ECB expected a slight fall in profitability to mean lower distributions rather than weaker capital. For investors, the question is less whether returns ease than how wide the gap to the cost of equity becomes as they do.
What to watch
- 17 April 2025: next ECB Governing Council meeting on the ECB's 2025 calendar.
- Beginning of August 2025: EBA expects to publish the 2025 EU-wide stress test results for 64 banks.
Primary sources: European Banking Authority, EU/EEA banking sector remains stable amidst evolving geopolitical challenges (press release on the Q4 2024 Risk Dashboard), 21 March 2025; European Central Bank, Financial Stability Review, November 2024, 20 November 2024; European Central Bank (Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the fourth quarter of 2024, 20 March 2025; European Central Bank, Monetary policy decisions (press release), 6 March 2025; European Banking Authority, EBA Risk Dashboard, Q4 2024 (data as of December 2024), 21 March 2025; European Banking Authority, Risk Assessment Report of the European Banking Authority, November 2024 (autumn edition), 29 November 2024; European Central Bank, ECB publishes indicative operational calendars for 2025, 19 July 2024; European Banking Authority, The EBA launches its 2025 EU-wide stress test, 20 January 2025.