Clarity in Credit

European Banks 2026 Outlook

Episode Summary

In the latest episode of our “Clarity in Credit” podcast series, Arnaud Journois, Senior Vice President of European Financial Institution Ratings, and Jason Graffam, Senior Vice President, Sector Lead, Global Sovereign Ratings are joined by Sonja Forster, Senior Vice President, European Financial Institution Ratings to discuss the European banking sector.

Episode Notes

The results for European banks over the last few years have been very good. This is in large part thanks to the higher interest rate environment, which has helped to support bank earnings. At the same time, higher rates have not resulted in a deterioration in asset quality. The year 2025 looks set to close for European banks as another year with strong profits, even though banks have faced some earnings pressure as interest rates gradually decline and from additional capital requirements. The open question for 2026 is how the European banking sector performs as earnings retreat from their recent peak.

KEY HIGHLIGHTS

European banks’ profitability has declined from recent highs but remains strong. Interest rates appear to have settled, and along with the favorable operating environment in many European countries, bank earnings should stabilize in 2026.
The benefits to bank earnings from the decline in the cost of risk in recent years are set to decline, but broadly speaking, asset quality for recent vintages has remained remarkably strong in most European countries. We expect no major deterioration in asset quality.
European banks remain well capitalized, despite the noticeable impact on individual banks’ capital ratios from the introduction of CRR3.
Many banks have started to tap their capital buffers by paying out higher dividends and increasing investments. Many large banks are making significant investments in Artificial Intelligence, primarily to keep costs down.
M&A activity has also gained momentum, principally from bolt-on acquisitions. Larger-scale acquisitions are more complicated and have encountered political opposition.
There is still a positive bias in credit ratings for European banks, although less than in the last few years.

RELATED CONTENT:

Commentary: 2026 European Banking Sector Outlook Neutral: A Goldilocks Year Ahead? https://dbrs.morningstar.com/research/467824

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