ECB's diagnosis of banks: the system in Europe is 'sound'
Good level of high-quality capital: average Cet1 at 16.1% of risk-weighted assets. With margin and fees profitability is 'solid': return on capital at 10.1%
by Luca Davi
The environment remains 'difficult', due to 'high' geopolitical risks and the challenges arising from digitalisation and the increasing supply of financial services by non-banks. But in the face of this scenario, European banks as a whole are 'solid' thanks to their accumulated capital, abundant cash on hand and strong profitability.
The European Central Bank, through its dedicated banking supervision arm, takes its customary annual snapshot of the health of the European credit sector. It does so by reading the aggregate results of the supervisory review and assessment process (the so-called Srep) for 2025, relating to the 105 supervised banks, which provides a detailed analysis of their capital, liquidity, profitability, governance and risk management. A snapshot that does not capture individual cases, but overall paints a more than reassuring picture, more than ten years after the launch of the Single Supervisory Authority.
The starting figure concerns the overall Cet1 capital requirement and the Pillar 2 guidance and requirements applicable in 2026, which remained 'substantially stable', the Supervisory Authority explained in a note: at 11.2% and 1.2% respectively, while the non-binding Pillar 2 guidance for 2026 decreased from 1.3% to 1.1%. The weighted average Cet1 - a bank's highest quality capital - stood at 16.1 per cent of risk-weighted assets (Credem is among the top three European banks). "So far, the euro area banking sector has continued to show good resilience, although the impact of higher tariffs on the corporate sector and banks' balance sheets will only gradually become fully apparent," ECB Supervisory Board Chair Claudia Buch warned at the press conference.
"Profitability is also 'solid', thanks to the support of the net interest margin and net commissions: the return on capital is 10.1%. In terms of asset quality, the situation remains equally 'solid', with a ratio of impaired loans to total loans of 1.9%. Some signs of tension came from the segment of loans with commercial real estate guarantees and in favour of SMEs, with above-average figures (4.6% and 4.9% respectively), but overall Stage 2 loans - with significantly increased credit risk - grew only "marginally", from 9.5% in 2024 to 9.6% today.
Yesterday's press conference was also an opportunity for Buch to reflect on the current scenario. Hence the focus on the exit path of European banks from their Russian activities - "it is on the right track", the official commented - and on the topic of the banking union, for which it is "essential" to complete the single deposit insurance.
