Coverage: Q3 2024 · Information to 20 December 2024
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TGB Quarterly Regional Banking Monitor · 20 December 2024
European banks held returns near their highs in the third quarter of 2024, with EU/EEA return on equity at 11.1%, but margins edged down from their peak as the ECB, the Bank of England, the SNB and the Riksbank kept cutting rates.
The desk view
The third quarter of 2024 marked the turn in European bank earnings rather than their end. EU/EEA banks lifted return on equity by 20bp on the quarter to 11.1%, but the net interest margin slipped 3bp from its first-quarter peak to 1.66%, and net interest income subtracted from the change in returns. Euro area banks reported in the October bank lending survey the first negative impact of ECB rate decisions on their margins since the end of 2022. Capital is not the constraint: the EU/EEA fully loaded CET1 ratio was 16.0%, and the ECB kept 2025 requirements broadly steady. The pressure points are commercial real estate, consumer credit and SME lending, low returns in Germany and France, and the uneven pace of easing across the region.
The regional picture
European monetary policy moved further into an easing phase in the second half of 2024, but at different speeds. The ECB lowered its deposit facility rate by 25bp to 3.50% on 12 September 2024, to 3.25% on 17 October and to 3.00% on 12 December, with the last cut effective from 18 December 2024. The three decisions removed 75bp from the deposit rate. The Bank of England's Monetary Policy Committee cut Bank Rate by 0.25 percentage points to 4.75% at its meeting ending on 6 November 2024, by an 8–1 vote, and then held at 4.75% at its meeting ending on 18 December 2024, with three members preferring a cut to 4.5%. The Swiss National Bank lowered its policy rate by 0.5 percentage points to 0.5% on 12 December 2024. The Riksbank cut by 0.25 percentage points to 2.5 per cent on 19 December 2024, after a larger cut in November, and has cut by a total of 1.5 percentage points since May. Norges Bank was the exception: it kept its policy rate at 4.5% at its meeting on 18 December 2024, a level held since December 2023, while signalling that a cut will most likely come in March 2025.
The inflation backdrop explains much of the divergence. ECB staff projected euro area headline inflation averaging 2.4% in 2024 and 2.1% in 2025, and growth of 0.7% in 2024 and 1.1% in 2025, with a slower recovery than in the September projections. UK CPI inflation rose to 2.6% in November 2024 from 1.7% in September, which kept the Monetary Policy Committee on what it called a gradual approach to removing restraint. Swiss inflation fell from 1.1% in August to 0.7% in November 2024, and the SNB's forecast put average inflation at 0.3% in 2025.
Policy rates after the latest decision to 19 December 2024, %
Source: European Central Bank, Monetary policy decisions (12 December 2024), 12 December 2024; Bank of England, Monetary Policy Summary, December 2024, 19 December 2024; Swiss National Bank, Monetary policy assessment of 12 December 2024: Swiss National Bank eases monetary policy and lowers SNB policy rate to 0.5%, 12 December 2024; Sveriges Riksbank, Policy rate cut by 0.25 percentage points to 2.5 per cent, 19 December 2024; Norges Bank, Monetary policy meeting December 2024: policy rate kept unchanged at 4.5 percent, 19 December 2024; European Central Bank, Financial Stability Review, November 2024, 20 November 2024; European Banking Authority, Risk Dashboard Q3 2024: Data Annex (Interactive Risk Dashboard Q3 2024, sheet 'KRIs by country and EU'), 18 December 2024; European Central Bank (Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the second quarter of 2024, 23 September 2024; Banca d'Italia, Financial Stability Report, No. 2 - 2024, 30 November 2024; Deutsche Bank AG, Deutsche Bank reports third-quarter 2024 profit before tax of € 2.3 billion (media release), 23 October 2024.
For banks, the more important change was in funding and balance sheets. The ECB said marginal funding costs were declining as it eased policy, and that bank bond spreads had remained at their lowest levels since the start of the hiking cycle. Euro area banks were to repay the remaining targeted longer-term refinancing operations in December 2024, and the Governing Council would end reinvestments under the PEPP at the end of 2024. The ECB reported that the decline in banks' liquidity coverage ratios had been modest despite the large volume of TLTRO repayments made since the fourth quarter of 2022. The comparisons below mix reference dates: EBA country data refer to September 2024, ECB supervisory statistics and national reports mainly to June 2024, and bank results to the third quarter of 2024.
Euro area: profitability past its peak, capital intact
ECB-supervised significant institutions reported an aggregated annualised return on equity of 10.11% in the second quarter of 2024, the highest value since the series began in the second quarter of 2015. Net interest income rose 6.5% year on year, and the net interest margin was 1.61%, against 1.53% a year earlier. The ECB's November 2024 Financial Stability Review nonetheless judged that net interest income had peaked and that net interest margins were probably past their peak while loan volumes remained weak. It concluded that bank profitability may have peaked, as pressure on earnings from floating-rate assets becomes a headwind for interest income while credit losses start to rise.
The EBA's third-quarter data show that turn under way across the wider EU/EEA. Return on equity rose by 20bp on the quarter to 11.1%, unchanged on a year earlier, but the increase came from other operating income and lower expenses, while net interest income and net trading income subtracted from it. The net interest margin fell 3bp from its first-quarter peak to 1.66%, and the cost of risk declined to 47bp. Banks themselves expect more of the same: in the October 2024 bank lending survey, euro area banks reported the first negative impact of ECB rate decisions on their net interest margins since the end of 2022, and expected that impact to deepen and overall profitability to fall from the levels reached during the 2022-2023 tightening cycle. Taken together, these sources point to returns that stay high for a time and then drift lower as margins compress.
Credit growth and asset quality
Lending has yet to turn decisively. EU/EEA outstanding loans slightly decreased in the third quarter of 2024, driven by a 1.6% fall in loans to non-financial corporates, while household loans were stable. In the euro area, annual growth remained low but positive: the annual growth rate of adjusted loans to non-financial corporations was 1.2% in October 2024 and to households 0.8%. The bank lending survey reported unchanged credit standards for loans to firms in the third quarter of 2024 (a net percentage of 0%), after more than two years of consecutive tightening, a net easing for housing loans (net -3%) and a further tightening for consumer credit (net 6%). Firms' net loan demand rose moderately for the first time since the third quarter of 2022, and housing loan demand rebounded strongly. For the fourth quarter of 2024, banks expected to tighten standards again for loans to firms and consumer credit, and to ease them for housing loans.
Asset quality is deteriorating slowly from a strong base. The EU/EEA NPL ratio rose 2bp to 1.88% in the third quarter of 2024, while the share of Stage 2 loans was 9.2%, against 9.3% in June 2024. For ECB-supervised banks, the NPL ratio was 2.30% in the second quarter of 2024, while it was 3.57% for loans to non-financial corporations, 4.61% for corporate loans collateralised by commercial property and 4.83% for loans to SMEs. The ECB said the deterioration was concentrated in commercial real estate, SMEs and consumer credit. In the EBA's latest risk assessment questionnaire, nearly half of banks expected asset quality to worsen over the next 6 to 12 months, particularly in consumer credit, SME and CRE lending, although that share was lower than in previous surveys.
Capital, liquidity and supervision
Capital headroom remains wide. The EU/EEA fully loaded CET1 ratio declined by 10bp to 16.0% in the third quarter of 2024, while the liquidity coverage ratio fell to 161.4% and the net stable funding ratio to 127.2%. The ECB noted that euro area banks had kept CET1 ratios of around 15% since early 2023 while making sizeable distributions through dividends and share buybacks. Its 2024 Supervisory Review and Evaluation Process (SREP) put the aggregate CET1 ratio at 15.8% in mid-2024 and the leverage ratio at 5.8%. Pillar 2 CET1 requirements rose from 1.1% to around 1.2% of risk-weighted assets, and overall CET1 requirements and guidance from 11.2% to 11.3%, with the new requirements applicable from 2025. The average SREP score was stable at 2.6, with 74% of banks unchanged on 2023, 11% worse and 15% better. Scores were hurt by lower commercial real estate valuations and higher interest rate risk in the banking book, but helped by profitability.
Germany: low returns, rising property losses
Banks in Germany remain among the least profitable in the region. EBA data put their return on equity at 6.30% in September 2024, against 11.10% for the EU/EEA, with a net interest margin of 1.13% and a cost-to-income ratio of 61.07%. The gap to the EU/EEA average return was therefore 4.80 percentage points. Capital is not the issue: the CET1 ratio was 16.57% and the NPL ratio 1.43%. The Bundesbank's Financial Stability Review 2024 found that the financial system had weathered the rise in interest rates well, and that bank profitability continued to benefit from low deposit rates and correspondingly low funding costs. It also warned that credit risk was increasingly in the spotlight and that losses on commercial real estate loans had risen considerably, although they were concentrated in a handful of banks and insurers. ECB supervisory statistics point the same way: the NPL ratio on corporate loans collateralised by commercial property at German significant institutions was 5.33% in Q2 2024, against 4.61% for all significant institutions. The Bundesbank judged that the macroprudential package of January 2022, comprising the countercyclical capital buffer and the sectoral systemic risk buffer on residential real estate loans, remains appropriate.
At bank level, Deutsche Bank reported third-quarter 2024 post-tax profit of €1.7 billion, helped by the release of approximately €440 million of Postbank-related litigation provisions, and a CET1 ratio of 13.8%. Its provision for credit losses rose to €494 million, from €245 million a year earlier. Provisions roughly doubled on the year, consistent with the Bundesbank's emphasis on credit risk.
France: thin margins, solid capital
France has the lowest margins in the euro area's large systems. ECB supervisory statistics showed a net interest margin of 0.89% at French significant institutions in the second quarter of 2024, the lowest among reporting countries, against 3.78% in Latvia. EBA data for September 2024 put French banks' net interest margin at 0.89%, return on equity at 6.86% and cost-to-income ratio at 67.18%, the weakest efficiency figure among the large systems in this monitor. Balance sheets are sound, with a CET1 ratio of 15.72% and an NPL ratio of 2.06%. BNP Paribas reported third-quarter 2024 net income of €2,868m, up 5.9%, with a cost of risk of 32bp and a CET1 ratio of 12.7%.
Italy: profitability at a high, provisions ahead
Italian banks combine high returns with a capital base above the euro area average. Banca d'Italia's latest Financial Stability Report put the CET1 ratio of the whole system at 15.9 per cent in June 2024, 30 basis points higher than at the end of 2023, and found the capitalisation of Italian significant banks about 40 basis points above the SSM average. Return on equity net of non-recurring items rose from 13.2 to 14.3 per cent in the first half of 2024, mainly because net interest income grew 9.1 per cent, and profitability was at its highest since 2008. EBA data for September 2024 show a return on equity of 15.65% and a cost-to-income ratio of 47.86%. The loan default rate was essentially unchanged at 1.3 per cent in the third quarter of 2024, and the net NPL ratio was 1.5 per cent in June 2024. Banca d'Italia warned that a gradual fall in net interest income and higher loan loss provisions over the next two years could weigh on profitability. UniCredit's third-quarter 2024 net profit rose 8% to €2.5 billion, with a cost of risk of 15 basis points and a CET1 ratio of 16.1%.
Spain: high margins, a new buffer
Spanish banks earn high margins on a thinner capital base. EBA data for September 2024 show a net interest margin of 2.81%, a return on equity of 14.67% and a cost-to-income ratio of 43.25%, but a CET1 ratio of 12.82%, the lowest among the countries in this monitor. The NPL ratio was 2.78%. On 1 October 2024 the Banco de España adopted a new framework for the countercyclical capital buffer, with a 1% target rate for a standard level of cyclical systemic risk, and set the rate at 0.5% from 2024 Q4, applicable from 1 October 2025. If risk stays at that level, the rate will foreseeably rise to 1% from 2025 Q4, applicable from 1 October 2026. Santander reported third-quarter 2024 attributable profit of €3,250 million, up 12%, a fully loaded CET1 ratio of 12.5%, a return on tangible equity of 16.2% for the first nine months and an NPL ratio of 3.06%.
United Kingdom: rates on hold, earnings robust
The Bank of England's November 2024 Financial Stability Report judged the UK banking system well capitalised, with an aggregate CET1 ratio of 14.8% for major banks and building societies in 2024 Q2 and 18.1% for small and medium-sized banks. Major UK banks' three-month average liquidity coverage ratio was 151% in September 2024. They reported underlying returns on tangible equity of 14.0% in 2024 Q3, around estimates of their cost of equity, and pre-provision profits rose to £16.2 billion on the quarter, largely on higher net interest income. The Bank said hedging should temper the effect of falling rates on margins. The Financial Policy Committee kept the UK countercyclical capital buffer at its neutral 2%, supported by the 2024 desk-based stress test, which suggested that the banks' aggregate capital ratio would stay above the hurdle rate in both a severe supply shock and a severe demand shock. The PRA has set 1 January 2026 for Basel 3.1 to take effect, with transitional arrangements until the end of 2029. One specific risk is motor finance: after the Court of Appeal ruled in October 2024 that commission paid to car dealers was unlawful unless properly disclosed and consented to, some lenders face uncertainty over redress. HSBC reported third-quarter 2024 profit after tax of $6.7bn and a CET1 ratio of 15.2% at 30 September 2024.
Switzerland and the Nordic countries
The SNB's 0.5 percentage point cut in December took its policy rate to 0.5%, and bank sight deposits are remunerated at that rate only up to a threshold, with 0% above it. UBS reported third-quarter 2024 net profit of USD 1,425m and a return on CET1 capital of 7.6%. After it accelerated the amortisation of transitional purchase price allocation adjustments, its CET1 ratio was 14.3%, against 14.9% without that step.
Among the countries in this monitor, the Nordic systems combine the strongest capital ratios with the lowest problem-loan ratios. EBA data for September 2024 show CET1 ratios of 19.40% in Sweden, 19.06% in Denmark and 18.82% in Norway, and NPL ratios of 0.36%, 1.22% and 0.88% respectively. Returns on equity were 14.83% in Sweden, 12.54% in Denmark and 14.67% in Norway. Among the countries in this monitor, Norwegian banks' cost-to-income ratio of 37.97% was second only to Poland's 37.00%, alongside a net interest margin of 2.12%. Policy diverged: the Riksbank had cut its rate to 2.5 per cent, whereas Norges Bank kept its rate at 4.5%.
Polish banks had the highest return on equity and net interest margin among the countries in this monitor, at 19.05% and 4.46% in September 2024, but also the highest NPL ratio, at 3.96%.
Cross-country comparison
EU/EEA banking systems, key risk indicators, September 2024
| Country | CET1 ratio | NPL ratio | Return on equity | Net interest margin | Cost-to-income |
|---|---|---|---|---|---|
| EU/EEA | 16.03% | 1.88% | 11.10% | 1.66% | 52.60% |
| Germany | 16.57% | 1.43% | 6.30% | 1.13% | 61.07% |
| France | 15.72% | 2.06% | 6.86% | 0.89% | 67.18% |
| Italy | 16.39% | 2.40% | 15.65% | 2.28% | 47.86% |
| Spain | 12.82% | 2.78% | 14.67% | 2.81% | 43.25% |
| Netherlands | 15.81% | 1.41% | 12.28% | 1.62% | 51.27% |
| Belgium | 17.05% | 1.31% | 12.34% | 1.64% | 50.93% |
| Austria | 16.38% | 2.27% | 13.59% | 2.29% | 48.58% |
| Sweden | 19.40% | 0.36% | 14.83% | 1.44% | 42.40% |
| Denmark | 19.06% | 1.22% | 12.54% | 1.12% | 43.20% |
| Norway | 18.82% | 0.88% | 14.67% | 2.12% | 37.97% |
| Poland | 16.59% | 3.96% | 19.05% | 4.46% | 37.00% |
Return on equity by country, September 2024, %
The table shows that profitability, not solvency, separates Europe's banking systems. CET1 ratios in the countries shown range from 12.82% in Spain to 19.40% in Sweden, while returns on equity range from 6.30% in Germany to 19.05% in Poland. The three systems with the highest returns, Poland, Italy and Sweden, all report margins above the French and German levels.
Large European banks, third-quarter 2024 results
| Bank | Quarterly profit | CET1 ratio | Other indicator |
|---|---|---|---|
| HSBC | Profit after tax $6.7bn | 15.2% | Up $0.5bn on 3Q23 |
| Santander | Attributable profit €3,250m | 12.5% (fully loaded) | RoTE 16.2% (nine months) |
| BNP Paribas | Net income, Group share €2,868m | 12.7% | Cost of risk 32bp |
| UniCredit | Net profit €2.5bn | 16.1% | Cost of risk 15bp |
| Deutsche Bank | Post-tax profit €1.7bn | 13.8% | Credit-loss provisions €494m |
| UBS | Net profit USD 1,425m | 14.3% | Return on CET1 capital 7.6% |
Source: HSBC Holdings plc, HSBC Holdings plc 3Q 2024 Earnings Release, 29 October 2024; Banco Santander, Santander reports profit of €9,309 million (+14%) for the first nine months of the year, 29 October 2024; BNP Paribas, Third quarter 2024 results press release, 31 October 2024; UniCredit, UniCredit: 3Q24 and 9M24 Group Results. Record 3Q and 9M Results, 6 November 2024; Deutsche Bank AG, Deutsche Bank reports third-quarter 2024 profit before tax of € 2.3 billion (media release), 23 October 2024; UBS Group AG, UBS reports 3Q24 net profit of USD 1.4bn (media release), 30 October 2024.
Capital requirements and buffers: recent decisions
| Authority | Measure | Setting | Timing |
|---|---|---|---|
| ECB (2024 SREP) | Pillar 2 CET1 requirement | Around 1.2% of RWAs, from 1.1% | Applicable from 2025 |
| ECB (2024 SREP) | Overall CET1 requirements and guidance | 11.3%, from 11.2% | Applicable from 2025 |
| Banco de España | Countercyclical capital buffer | 0.5%, target 1% | From 2024 Q4, applicable 1 October 2025 |
| Bank of England FPC | UK countercyclical capital buffer | 2% (neutral setting) | Maintained |
| PRA | Basel 3.1 standards | Transition to end-2029 | In force 1 January 2026 |
Source: European Central Bank (Banking Supervision), ECB keeps capital requirements broadly steady for 2025, reflecting strong bank performance amid heightened geopolitical risks, 17 December 2024; Banco de España, The Banco de España approves the new framework for setting the countercyclical capital buffer and sets the buffer rate for 2024 Q4 at 0.5%, 1 October 2024; Bank of England, Financial Stability Report - November 2024, 29 November 2024.
Outlook risks
The central risk for 2025 is that margins fall faster than credit costs. Euro area banks expect the negative effect of ECB rate policy on their margins to deepen, and Banca d'Italia expects higher loan loss provisions over the next two years. Commercial real estate remains the asset-quality fault line: it weighed on SREP scores, drove the deterioration flagged by the ECB and lifted German property-loan losses. Growth is a second risk, with ECB staff now expecting a slower recovery than in September. In the United Kingdom, the motor finance ruling is a source of uncertainty over redress costs for some lenders. Against those risks, capital ratios of around 16% across the EU/EEA, a Pillar 2 requirement raised only to around 1.2% and a UK system that passed its 2024 desk-based stress test leave banks with room to absorb losses.
What to watch
- March 2025: Norges Bank expects that its policy rate will most likely be reduced from 4.5%.
- First half of 2025: the Riksbank says its policy rate may be cut again from 2.5 per cent if the outlook is unchanged.
- 2025: the Bank of England will run its next bank capital stress test, in which banks participate.
- 1 October 2025: Spain's 0.5% countercyclical capital buffer becomes applicable; the rate is expected to rise to 1% from 2025 Q4.
- 1 January 2026: Basel 3.1 capital standards take effect for UK banks.
Primary sources: European Banking Authority, EU/EEA banks’ profitability is holding up well despite declining net interest margin (Q3 2024 Risk Dashboard press release), 18 December 2024; European Central Bank, Monetary policy decisions (12 December 2024), 12 December 2024; Bank of England, Monetary Policy Summary, November 2024, 7 November 2024; Swiss National Bank, Monetary policy assessment of 12 December 2024: Swiss National Bank eases monetary policy and lowers SNB policy rate to 0.5%, 12 December 2024; Sveriges Riksbank, Policy rate cut by 0.25 percentage points to 2.5 per cent, 19 December 2024; European Central Bank (Banking Supervision), ECB keeps capital requirements broadly steady for 2025, reflecting strong bank performance amid heightened geopolitical risks, 17 December 2024; European Central Bank, October 2024 euro area bank lending survey, 15 October 2024; European Central Bank, Financial Stability Review, November 2024, 20 November 2024; European Banking Authority, Risk Dashboard Q3 2024: Data Annex (Interactive Risk Dashboard Q3 2024, sheet 'KRIs by country and EU'), 18 December 2024; Bank of England, Monetary Policy Summary, December 2024, 19 December 2024; Norges Bank, Monetary policy meeting December 2024: policy rate kept unchanged at 4.5 percent, 19 December 2024; European Central Bank, Monetary policy decisions (12 September 2024), 12 September 2024; European Central Bank, Monetary policy decisions (17 October 2024), 17 October 2024; European Central Bank (Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the second quarter of 2024, 23 September 2024; Banca d'Italia, Financial Stability Report, No. 2 - 2024, 30 November 2024; Deutsche Bank AG, Deutsche Bank reports third-quarter 2024 profit before tax of € 2.3 billion (media release), 23 October 2024; European Central Bank, Monetary developments in the euro area: October 2024, 28 November 2024; Deutsche Bundesbank, Bundesbank: Financial system has weathered interest rate changes since 2022 well and is proving stable, 21 November 2024; European Central Bank (Banking Supervision), Supervisory Banking Statistics for significant institutions, Second quarter 2024, 23 September 2024; BNP Paribas, Third quarter 2024 results press release, 31 October 2024; UniCredit, UniCredit: 3Q24 and 9M24 Group Results. Record 3Q and 9M Results, 6 November 2024; Banco de España, The Banco de España approves the new framework for setting the countercyclical capital buffer and sets the buffer rate for 2024 Q4 at 0.5%, 1 October 2024; Banco Santander, Santander reports profit of €9,309 million (+14%) for the first nine months of the year, 29 October 2024; Bank of England, Financial Stability Report - November 2024, 29 November 2024; HSBC Holdings plc, HSBC Holdings plc 3Q 2024 Earnings Release, 29 October 2024; UBS Group AG, UBS reports 3Q24 net profit of USD 1.4bn (media release), 30 October 2024.