The cost of risk could rise by 10 basis points in 2026 compared with 2025, reflecting increased geopolitical risks and macroeconomic uncertainty, although provisions will remain low overall.
Scope Ratings Analysis
European banks are profitable, well-capitalised and have sound balance sheets. Our outlook is positive, although we are closely monitoring the knock-on effects of the war in the Middle East, the risk of stagflation, merger and acquisition activity, interest rate policy and the interconnection with the private credit sector.
Although EU banks’ exposure to the Middle East is limited and a fragile ceasefire remains in place, concerns persist regarding the indirect effects of the war, which could materialise through increased market volatility, rising oil prices and disruptions to supply chains.
“A slowdown in economic growth and a prolongation of the conflict could lead to a stagflationary scenario, which would increase credit losses and affect banks’ cost efficiency,” said Marco Troiano, Head of Financial Institutions at Scope. “However, according to our stagflation simulation, more than 90 per cent of European banks included in our representative sample of the sector would remain profitable in 2026 and 2027.”
The ECB’s change of course on its interest rate path due to inflationary pressures, and the consequent decision to keep rates at high levels for longer, is a favourable factor for most banks and good news for their net interest margins and profitability. “We have significantly revised our revenue forecasts upwards; this growth will come from both interest income and other sources,” said Troiano. “Stable interest rates, balance sheet hedging and sustained strength in credit demand are underpinning net interest income, whilst fee income continues to grow steadily. The combination of a more favourable interest rate path and stronger credit growth underpins the improvement in our forecasts for return on risk-weighted assets for 2026 and 2027.”
Favourable outlook for asset quality
Asset quality remains sound, although there are some areas of vulnerability. “Even so, our outlook is favourable despite the many existing uncertainties,” said Alessandro Boratti, associate director of Scope’s Financial Institutions team. “However, developments will vary across different institutions: peripheral countries will continue to make progress in cleaning up their balance sheets, whilst in core Europe there will be some deterioration.”
We expect the cost of risk to rise by 10 basis points in 2026 compared with 2025, reflecting increased geopolitical risks and macroeconomic uncertainty, although provisions will remain low overall. We also observe a moderate rise in credit losses in the first quarter of 2026 compared with the same period in 2025.
‘Bank capital ratios have declined due to a combination of higher capital requirements, shareholder returns and mergers and acquisitions, although they remain solid,’ said Boratti. ‘In this context, we are monitoring synthetic risk transfer activity to assess the extent to which banks rely on these transactions and the potential refinancing risk,’ he warned.
In the sample of banks analysed by Scope, the capital benefits derived from synthetic risk transfer (SRT) transactions range from a few basis points to over 100 basis points. Although the information published has improved, there is still not full transparency regarding the impact of these transactions on capital.
Cross-border mergers and acquisitions remain economically unviable
Recent reforms that have strengthened banks’ crisis management mechanisms represent a step towards the objectives of the European Banking Union and have several positive implications for banks. These reforms alleviate concerns about potential cross-subsidies between countries and bring the system closer to the objectives of the European Deposit Insurance Scheme.
“Furthermore, given that deposits now have general priority in the event of insolvency and therefore rank ahead of unsecured senior debt, clearer liability structures could reduce MREL subordination requirements. The harmonisation of the liability hierarchy also increases transparency for credit investors across the sector,” said Troiano.
Deposit ratings could improve in those jurisdictions where full preference is introduced. Issuer ratings will depend on how each bank responds to the new liability hierarchy.
However, in the absence of a common deposit guarantee scheme, the loss of contributions previously made to national schemes renders cross-border mergers economically unviable and forces banks to maintain costly structures involving multiple entities. The need to retain separate banking subsidiaries prevents capital and liquidity resources from being fully mobilised across different EU countries.
“These obstacles hinder the consolidation of the sector – which we view as beneficial for the diversification of business models and profitability – and complicate the creation of large pan-European banks capable of competing on an international scale,” said Troiano. “Therefore, although mergers and acquisitions continue to gain momentum as banks seek to increase their scale and diversification, purely cross-border transactions within the EU remain the exception.”
Links to the private credit sector
With regard to the private credit sector, cases of fraud, restrictions on repayments due to liquidity constraints and significant information gaps have highlighted structural weaknesses. European banks’ exposure appears to be limited, ranging between 1 per cent and 5 per cent of loans to customers, according to information published by the banks themselves. However, the information available across the sector as a whole is patchy and fragmented.
“Direct lending, financing against net asset value and credit facilities to meet capital calls can create parallel exposures backed by the same cash flows, which may lead banks to underestimate their level of leverage. At the same time, overlapping structures can mask the actual concentration of risks, making stress testing and risk monitoring more difficult for both lenders and regulators,” said Troiano.
