TGB Regional Banking Monitor: Europe — Q2 2024

The regional picture

By the middle of 2024 most European central banks had moved from holding rates to cutting them. The ECB lowered its three key interest rates by 25bp on 6 June 2024 after nine months of holding them steady. The Swiss National Bank followed on 20 June 2024 with a cut of 0.25 percentage points to 1.25%. The Magyar Nemzeti Bank lowered its base rate by 25bp to 6.75% on 23 July 2024, and the Czech National Bank cut its two-week repo rate by 0.25 percentage point to 4.50% on 1 August 2024. The Bank of England's Monetary Policy Committee voted 5–4 at its meeting ending on 31 July 2024 to cut Bank Rate by 0.25 percentage points to 5%. The Riksbank cut its policy rate by 0.25 percentage points to 3.5% on 20 August 2024.

The third quarter of 2024 extended the pattern, but not uniformly. The ECB cut its deposit facility rate by a further 25bp to 3.50% on 12 September 2024, effective 18 September, and Danmarks Nationalbank lowered its current-account rate by 0.25 percentage point to 3.10% with effect from 13 September 2024. The Magyar Nemzeti Bank left its base rate unchanged at 6.75% on 27 August 2024. The Bank of England held Bank Rate at 5% by an 8–1 vote at its meeting ending on 18 September 2024. Norges Bank kept its policy rate at 4.5% at its meeting on 18 September 2024, a level held since December 2023.

Across the two ECB decisions the deposit facility rate fell by a cumulative 50bp. Bank Rate stood 1.50 percentage points above the ECB deposit facility rate once the September cut took effect. Euro area annual inflation was 2.2% in August 2024, down from 2.6% in July, and UK CPI inflation was also 2.2% in August. Harmonised inflation was 1.0% in Switzerland, 1.3% in Sweden and 2.3% in Norway in August 2024. It was 2.4% in Czechia, 3.4% in Hungary and 4.0% in Poland.

Banking indicators are published on different calendars, so the comparisons that follow mix reference dates: euro area supervisory data refer to the first quarter of 2024, UK supervisory data to 2024 Q1, Czech and Hungarian system data to the end of 2023, and bank results to the second quarter or first half of 2024.

Euro area: easing begins as balance sheets stay strong

Changes to the ECB's operational framework, announced on 13 March 2024, took effect on 18 September alongside the second cut. From 18 September the spread between the main refinancing operations rate and the deposit facility rate was set at 15bp, so the main refinancing and marginal lending rates fell to 3.65% and 3.90%. The Governing Council said it would continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. September staff projections put headline inflation at 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, and GDP growth at 0.8% in 2024, 1.3% in 2025 and 1.5% in 2026. Balance-sheet run-off continued: the ECB said it would reduce PEPP holdings by €7.5 billion per month on average over the second half of 2024 and intends to discontinue PEPP reinvestments at the end of 2024.

Capital, asset quality and profitability

Significant institutions supervised by the ECB reported an aggregate CET1 ratio of 15.74% in the first quarter of 2024, down from 15.80% in the previous quarter but up from 15.53% a year earlier. Country aggregates ranged from 12.66% in Spain to 23.63% in Latvia. The aggregate annualised return on equity was 9.67%, up from 9.31% in the fourth quarter of 2023. Net interest income rose by 8.7% year on year, and the net interest margin increased to 1.62% from 1.48% a year earlier. Margins varied widely, from 0.87% in France to 3.86% in Latvia.

Asset quality was stable at the aggregate level but weaker in specific books. The non-performing loan ratio was 2.31%, compared with 2.30% in the previous quarter and 2.24% a year earlier. The ratio for loans to non-financial corporations rose to 3.55% from 3.48% in the fourth quarter of 2023, and for households to 2.24% from 2.19%. Cost of risk rose to 0.50% from 0.46%. Stage 2 loans fell to 9.50% of the total from 9.73% in the previous quarter, but the stage 2 ratio reached 19.44% for corporate loans secured on immovable property and 15.70% for small and medium-sized enterprises.

The EBA's Risk Dashboard, based on 162 banks covering more than 80% of EU/EEA banking assets, showed a similar profile. EU/EEA banks reported a return on equity of 10.6% and a CET1 ratio of 15.9% in the first quarter of 2024, with net interest margins at 1.69%. Non-performing loans rose by 2% quarter on quarter, or €7bn, to a ratio of 1.86%, with the largest increase in the SME segment. The liquidity coverage ratio fell from 168.3% to 161.4% over the quarter, while the net stable funding ratio rose to 127.2%. The EBA reported that banks expect monetary easing and rate cuts to weigh on their interest income and overall profitability.

Credit conditions

Credit standards remained tight. In the July 2024 bank lending survey, euro area banks reported a small further net tightening of standards for loans to enterprises in the second quarter of 2024, with a net percentage of 3%. Standards for housing loans eased (net percentage of -6%), while those for consumer credit tightened (net percentage of 6%). Standards for firms tightened in all economic sectors in the first half of 2024, most markedly in commercial real estate. Demand from firms declined again, while household demand for housing loans and consumer credit increased for the first time since 2022. For the third quarter of 2024, banks expected a moderate net tightening for loans to firms and unchanged standards for households.

Lending volumes reflected these conditions. Annual growth of adjusted loans to households rose to 0.5% in July 2024 from 0.3% in June, while growth in loans to non-financial corporations eased to 0.6% from 0.7%. Household deposits grew by 2.2% in July, up from 2.0% in June. EU/EEA banks' loans to households and non-financial corporations had already fallen by 0.2% quarter on quarter in the first quarter of 2024, led by SME loans (-0.8%) and mortgages (-0.3%).

Stability view and regulation

The ECB's May 2024 Financial Stability Review said euro area banks had remained resilient, but that low bank valuations suggest investors are concerned about the durability of bank profitability. It added that bank funding costs seem set to remain high even if policy rates start declining. It advised macroprudential authorities to maintain existing capital buffers. On regulation, the EU banking package completing Basel III is set to apply from 1 January 2025. On 24 July 2024 the European Commission adopted a delegated act postponing by one year, to 1 January 2026, the application of the Fundamental Review of the Trading Book standards for market-risk capital. The Commission noted that the United States had not yet provided clarity on when and how it would finalise its implementation of the Basel III standards.

Large-bank results: strong earnings, high capital

Second-quarter and first-half results from five large European groups showed high capital ratios and solid underlying earnings. All five banks in the table reported CET1 ratios between 13.0% and 16.2%. UniCredit's gross NPE ratio stood at 2.6%, and BNP Paribas reported cost of risk of 33bp in the quarter. Deutsche Bank's quarter was distorted by a €1.3bn provision for litigation related to the Postbank takeover.

Selected large European banks: results and capital

Source: UniCredit S.p.A., UniCredit: 2Q24 and 1H24 Group Results (press release), 24 July 2024; BNP Paribas, Second quarter 2024 results press release, 24 July 2024; ING Groep N.V., ING posts 2Q2024 net result of EUR 1,780 million (press release), 1 August 2024; Deutsche Bank AG, Deutsche Bank reports first-half 2024 profit before tax of EUR 2.4 billion; EUR 3.8 billion excluding Postbank takeover litigation provision, 24 July 2024; HSBC Holdings plc, HSBC Holdings plc 2024 Interim results (media release), 31 July 2024.

The Postbank provision turned Deutsche Bank's quarterly post-tax return on tangible equity negative, at -1.0%, against 6.9% on an adjusted basis. HSBC's net interest margin fell by 8bp to 1.62% in the first half compared with a year earlier.

United Kingdom: one cut, then a hold

The Bank of England cut Bank Rate from 5.25% to 5% at its August 2024 meeting, with four of the nine members preferring no change. In September the Committee held at 5% by eight votes to one, said a gradual approach to removing policy restraint remains appropriate in the absence of material developments, and voted unanimously to reduce its gilt holdings by £100 billion over the next 12 months, to £558 billion. CPI inflation was 2.2% in August 2024 and was expected to rise to around 2½% towards the end of the year, while services inflation remained elevated at 5.6%.

The Bank's June 2024 Financial Stability Report described the UK banking system as well capitalised, with strong liquidity, and said major banks' return on equity had risen to around their cost of equity. Major UK banks had an aggregate CET1 ratio of 14.7% in 2024 Q1 and a three-month average liquidity coverage ratio of 150% in April, with about £1.3 trillion of high-quality liquid assets. Their underlying return on tangible equity rose from 11% in the previous quarter to 14% in 2024 Q1. The share of loans in IFRS 9 stage 2 or stage 3 fell to 12.3% in 2024 Q1 from 13.4% in 2023 Q3, and owner-occupier mortgage arrears were around 1.1%. The Financial Policy Committee kept the countercyclical capital buffer rate at its neutral setting of 2%.

The June report noted that the full impact of higher interest rates had not yet passed through to all mortgagors. Over three million mortgage accounts, or 35%, were still paying rates below 3%, most with fixed rates expiring before the end of 2026. Mortgage activity picked up in July: net approvals for house purchase rose to 62,000 in July 2024 from 60,600 in June, and net mortgage borrowing rose to £2.8 billion from £2.6 billion. The effective rate on newly drawn mortgages was broadly unchanged at 4.81% in July, while the rate on the outstanding stock rose by 4bp to 3.69%.

On 12 September 2024 the Prudential Regulation Authority published its second near-final Basel 3.1 policy statement and moved implementation by six months to 1 January 2026, with a transitional period ending on 31 December 2029. It estimated that Tier 1 capital requirements for major UK firms would rise by less than 1% in aggregate from January 2030. Changes from the consultation include lower capital requirements for SME exposures, leaving them no higher than today.

Switzerland: lower rates, UBS integration

The Swiss National Bank lowered its policy rate by 0.25 percentage points to 1.25% on 20 June 2024, effective 21 June. Sight deposits are remunerated at the policy rate up to a threshold and at 0.75% above it. Swiss inflation was 1.4% in May 2024, and the SNB's conditional forecast put average inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026. With harmonised inflation at 1.0% in August, the policy rate was 0.25 percentage point above inflation.

The SNB's June 2024 Financial Stability Report said domestically focused banks markedly improved their profitability in 2023, driven mainly by rising net interest income. At group level, as of the end of the first quarter of 2024, UBS already met its estimate of future capital requirements under the too-big-to-fail regulations. The combined bank has a transition period, with phase-in of the higher requirements from 2026 and ending in 2030 at the latest. The parent banks merged formally at the end of May 2024, the Swiss entities were due to merge in the third quarter of 2024, and integration is to be completed by the end of 2026. The SNB said the capital regime for parent banks should be strengthened, in line with Federal Council proposals for stronger capital backing of participations in foreign subsidiaries.

Nordics: Sweden cuts, Norway holds

The Riksbank's August cut took its policy rate to 3.5% from 3.75%. The Riksbank said that, if the inflation outlook remains the same, the policy rate can be cut two or three more times in 2024, somewhat faster than it had assessed in June. With Swedish harmonised inflation at 1.3% in August, the policy rate stood 2.2 percentage points above it. The Riksbank's May 2024 Financial Stability Report said the major Swedish banks hold CET1 capital ratios around 4 percentage points above requirements. In its stress test, a fall of around 30% in property valuations combined with a sharp deterioration in corporate earnings could leave the banks with loan losses of almost 2% of their lending to commercial property companies. Loan losses are increasing at some consumer credit banks.

Norges Bank's forecast implies a policy rate of 4.5% to the end of 2024, with gradual reductions from 2025 Q1. Norway's policy rate was 1 percentage point above Sweden's after the Riksbank's August cut.

Central Europe: easing from higher levels

The Czech National Bank's 1 August 2024 cut took the two-week repo rate to 4.50%. On the macroprudential side, the Bank Board decided on 6 June 2024 to cut the countercyclical capital buffer rate by 0.50 percentage point to 1.25% from 1 July 2024. It also set a general systemic risk buffer rate of 0.5% for the first time, which banks must maintain from 1 January 2025. The Czech banking sector's capital rose by CZK 49 billion to CZK 674 billion at the end of 2023, and its overall capital ratio increased by 0.6 percentage points to 22.6%.

The Magyar Nemzeti Bank's July cut took the base rate to 6.75%, the overnight deposit rate to 5.75% and the overnight lending rate to 7.75%, and the Monetary Council kept all three unchanged on 27 August 2024. Hungarian consumer prices had risen by 3.7% year on year in June, with core inflation at 4.1%. The base rate stood 3.35 percentage points above August harmonised inflation of 3.4%. The MNB's May 2024 Financial Stability Report put the sector's return on equity at nearly 24% at the end of 2023, up from 9% at the end of 2022, and its return on assets at nearly 2%. The MNB said this level of profitability is not sustainable. The consolidated capital adequacy ratio rose by 0.4 percentage point to 19.3% in 2023, with a CET1 ratio of 16.7%. The corporate non-performing loan ratio stagnated at 3.8%, while the household ratio fell to 2.4% by the end of February 2024.

Cross-country comparison

Europe banking monitor: policy rates, inflation and system indicators (reference dates in brackets)

Source: European Central Bank, Monetary policy decisions (12 September 2024), 12 September 2024; Eurostat, Annual inflation down to 2.2% in the euro area (August 2024), 18 September 2024; European Central Bank (ECB Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the first quarter of 2024, 26 June 2024; Bank of England, Bank Rate maintained at 5% - September 2024 (Monetary Policy Summary and minutes), 19 September 2024; Bank of England, Financial Stability Report - June 2024, 27 June 2024; Swiss National Bank, Monetary policy assessment of 20 June 2024 (press release), 20 June 2024; Swiss National Bank, Financial Stability Report 2024: Executive Summary, 20 June 2024; Sveriges Riksbank, Policy rate cut by 0.25 percentage points to 3.5 per cent (press release), 20 August 2024; Sveriges Riksbank, Financial Stability Report 2024:1, 29 May 2024; Norges Bank, Policy rate kept unchanged at 4.5 percent (press release), 19 September 2024; Danmarks Nationalbank, Interest rate reduction (12 September 2024), 12 September 2024; Czech National Bank, CNB Board decisions, 1 August 2024, 1 August 2024; Czech National Bank, Financial Stability Report - Spring 2024, 24 June 2024; Magyar Nemzeti Bank, Press release on the Monetary Council meeting of 27 August 2024, 27 August 2024; Magyar Nemzeti Bank, Financial Stability Report, May 2024, 31 May 2024.

Of the economies in the table, only Norway had kept its policy rate unchanged since December 2023; every other central bank had cut at least once in 2024. Hungary had the highest policy rate in the table, at 6.75%, and its banking sector had reported a return on equity of nearly 24% at the end of 2023. Among the larger systems with comparable capital measures, ECB-supervised banks reported a higher CET1 ratio than major UK banks, but a lower return on equity than UK banks' underlying return on tangible equity.

Outlook risks

The first risk for European banks is the earnings effect of lower rates. The EBA reported that banks expect rate cuts to weigh on interest income and profitability, and the ECB warned that funding costs seem set to remain high even if policy rates start declining. The second risk is credit quality in property-secured corporate lending and SME lending, where euro area stage 2 ratios were 19.44% and 15.70% in the first quarter of 2024 and EU/EEA non-performing loans rose fastest in the SME segment. The third is weak loan demand from firms, with euro area corporate loan growth at 0.6% in July 2024. In Sweden, the Riksbank pointed to rising loan losses at some consumer credit banks and to the major banks' exposure to commercial property companies. In Hungary, the central bank itself has said that 2023 profitability is not sustainable.

Primary sources: European Central Bank, July 2024 euro area bank lending survey, 16 July 2024; European Central Bank, Monetary policy decisions (6 June 2024), 6 June 2024; European Central Bank, Monetary policy decisions (12 September 2024), 12 September 2024; Bank of England, Bank Rate reduced to 5% - August 2024 (Monetary Policy Summary and minutes), 1 August 2024; European Central Bank (ECB Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the first quarter of 2024, 26 June 2024; European Central Bank, Monetary developments in the euro area: July 2024, 28 August 2024; Swiss National Bank, Monetary policy assessment of 20 June 2024 (press release), 20 June 2024; Sveriges Riksbank, Policy rate cut by 0.25 percentage points to 3.5 per cent (press release), 20 August 2024; Czech National Bank, CNB Board decisions, 1 August 2024, 1 August 2024; Magyar Nemzeti Bank, Press release on the Monetary Council meeting of 23 July 2024, 23 July 2024; Norges Bank, Policy rate kept unchanged at 4.5 percent (press release), 19 September 2024; European Banking Authority, Profitability of EU banks remains resilient although the sector is confronted with materialising credit risks (Q1 2024 Risk Dashboard press release), 20 June 2024; Danmarks Nationalbank, Interest rate reduction (12 September 2024), 12 September 2024; Magyar Nemzeti Bank, Press release on the Monetary Council meeting of 27 August 2024, 27 August 2024; Bank of England, Bank Rate maintained at 5% - September 2024 (Monetary Policy Summary and minutes), 19 September 2024; Eurostat, Annual inflation down to 2.2% in the euro area (August 2024), 18 September 2024; Bank of England, Financial Stability Report - June 2024, 27 June 2024; Czech National Bank, Financial Stability Report - Spring 2024, 24 June 2024; Magyar Nemzeti Bank, Financial Stability Report, May 2024, 31 May 2024; Deutsche Bank AG, Deutsche Bank reports first-half 2024 profit before tax of EUR 2.4 billion; EUR 3.8 billion excluding Postbank takeover litigation provision, 24 July 2024; HSBC Holdings plc, HSBC Holdings plc 2024 Interim results (media release), 31 July 2024; European Central Bank, Euro area financial stability conditions have improved as recession risks decline (Financial Stability Review, May 2024, press release), 16 May 2024; European Commission (DG FISMA), Banking package: Moving forward with the implementation of the Basel standards, while preserving the international level playing field (Questions and answers), 24 July 2024; BNP Paribas, Second quarter 2024 results press release, 24 July 2024; UniCredit S.p.A., UniCredit: 2Q24 and 1H24 Group Results (press release), 24 July 2024; ING Groep N.V., ING posts 2Q2024 net result of EUR 1,780 million (press release), 1 August 2024; Bank of England, Money and Credit - July 2024, 30 August 2024; Bank of England (Prudential Regulation Authority), The PRA publishes the second policy statement on Basel 3.1 and proposals on the strong and simple capital regime for smaller firms, 12 September 2024; Swiss National Bank, Financial Stability Report 2024: Executive Summary, 20 June 2024; Sveriges Riksbank, Financial Stability Report 2024:1, 29 May 2024.