Flattening RoE YoY amid fading support from net interest income

The RoE of EU/EEA banks remained nearly stable from June 2023 to June 2024, recording only a 10 bps decrease to 10.9%, and very close to the highest levels reported by the sector. While the increase in NII was previously a key determinant for the rise of banks’ RoE, in recent quarters its additional contribution dropped to just 10bps (YoY change). The most substantial positive factor, accounting for 80bps, was the significant reduction in contributions to DGS and resolution funds, as these funds should have reached their target levels by the beginning of 2024. Other expenses, including taxes, had the most negative impact, reducing RoE YoY by 80bps. This is likely attributable, at least in part, to the heightened taxation on banks – also referred as ‘windfall taxes' – implemented in certain Member States in response to the substantial profits recorded in the past year due to higher interest rate environment. Rising NFCI as well as NTI and declining other administrative expenses made slightly positive contributions to the YoY change of the RoE. Conversely, YoY changes in other operating income, provisions and impairments had negative impacts (Figure 50).

Source: EBA supervisory reporting data

Despite  historically high level of profitability, EU/EEA banks’ RoE on average currently tends to be below their CoE. Nearly 70% of banks report CoE higher than 10%^[1] (Figure 51). The elevated CoE is not solely the result of high interest rates, but likely also reflects broader macroeconomic and geopolitical risks, along with specific sector-related risks^[2]. It is similarly reflected in banks’ valuations, with on average price to book (PtB) multiples below one (Figure 65).

Source: EBA Risk Assessment Questionnaire

NII is the key component in EU/EEA banks’ RoE, reaching around 60% of EU/EEA banks’ total net operating income^[3]. There is, however, notable dispersion across Member States regarding their RoE levels, largely due to differences in NII. The trend in NII is influenced by several factors, including interest rate levels in the jurisdictions to which banks are exposed to and aspects like asset and liability composition and their repricing periods. Banks, for example, with exposures to CEE countries benefitted from the higher interest rates in these currencies. Other countries, such as the Baltic countries or Cyprus, presumably benefited from the faster and / or stronger repricing of the asset side vis-à-vis the slower and / or more muted repricing of their liability side. The contribution of interest income from central bank deposits might also have positively contributed to some banks’ RoE last year, despite the substantial decline in central banks’ deposits  (see Chapters 2.1 and 3.3). However, respective banks appear to experience greater pressure on their profitability due to central bank interest rate cuts and generally decreasing interest rates (see Figure 2 on currency interest rate levels). Banks in other countries, in contrast, still reported an increase in RoE, as they were presumably not yet hit to the same extent by the decline in interest rates. Nevertheless, NII developments depend on many other parameters, such as the asset and liability mix, prevalence of business models, and ability to maintain deposit betas low. The significant impact of NII on RoE is evident through a revenue composition analysis, which shows that countries with elevated profitability tend to have a higher ratio of NII to equity (Figure 52).

Source: EBA supervisory reporting data

Source: EBA supervisory reporting data

In the past, banks have demonstrated their ability to increase fee income when necessary

Fee income, the second most important revenue contributor reaching around 30% of total net operating income, has risen by around 8% YoY. Asset management and related products remained the key component (share of ca. 34% in total fee income), followed by payment services (share of ca. 28% in total fee income), which is similar to last year^[4]. When calculated as share of related underlying volume, asset management fees had for instance risen from 45bps in 2021 to 49bps in 2022 and declined in 2023 and 2024 to now 44 bps. Current account related fees grew from 13 bps in 2021 to 15 bps in 2023, before remaining flat this year. The levels of these fee components widely differ among countries. However, looking on the development of these fee components, many countries show similar trends with rising fee levels in recent years (Figure 53).

(*) The fee income component is Q2 annualised data for each of the years

In sight of the policy rate cuts across the continent, the pressure on NII is expected to intensify, incentivising banks to shift their attention to other sources of income to support their profitability levels. This is similarly reflected in the outlook through the RAQ results as a substantially smaller number of banks, compared to the previous two surveys, rely on NII to boost their profitability. At the same time, according to RAQ, banks increasingly prioritise to enhance their net fees and commission income while reducing their cost functions. This shift demonstrates a diversification of banks’ activities in the expectation of their RoE growth and shows that banks are dealing with the possible impact of lower rates. However, fee income faces pressure not only from competition within the banking sector but also from BigTech and Fintech firms. Depending on potential synergies with these firms, this an area that banks could benefit.  It may also come under pressure due to other developments, such as the potential introduction of central bank digital currencies (CBDC), depending on their concrete design^[5]. RAQ results further indicate that banks are not aiming to raise the deposit and current account related fees (Figure 30). Despite the shifting trends in NII dynamics, which have led 60% of banks to have a bleak outlook on profitability growth, 40% of banks still anticipate an improvement within the next 6 to 12 months (Figure 54).

Rise in costs below average inflation rate

Overall cost rose by less than 1% on an annual basis. Staff expenses remained the main component in total expenses, followed by other administrative expenses. Staff and other administrative expenses show major differences among countries, contributing to a relatively wide dispersion of overall costs and expenses. Measured in relative terms as share of equity, staff expenses tend to be lower in Nordic countries, but also several other countries fare favourably in this respect. For Nordic countries this is not least due to a presumably higher level of automatisation and digitalisation. This may also explain why other administrative costs are typically the lowest in Nordic countries (Figure 55).

Due to higher increase in revenues than in costs, EU/EEA banks’ cost-to-income ratio declined on a yearly basis from 57% to 53%. Most of the countries similarly saw a decline in the cost-to-income ratio. However, there are also several Member States that saw a rise. Notably, several of these countries have relatively high administrative costs. In other cases, the rise seems to be also driven by a decline in revenues. The average rise in costs of around 1% compares favourably with the average YoY inflation for the EU as of June 2024, which stood at around 2.6%. Assuming costs would have increased by the average EU inflation rate, banks’ RoE would be around 40bps lower and their cost-to-income ratio would be more than 1p.p. higher.

The CoR increased annually in the EU/EEA, from 45 bps to 51 bps. It stayed within the range of approximately 40 bps to 50 bps, a trend seen since June 2021, with the exception of Q1 2024, when CoR rose to 56 bps (Figure 64). According to RAQ, most banks expect these provisioning levels to remain below 50 bps. On country level there was still some major divergence, with some country averages reported notably higher than a year earlier. Banks in most of the Baltic as well and Nordic countries reported the lowest CoR (Figure 57).

(*) Data for LT skewed higher due to the sample, which include rather high-risk banks and not the biggest national lenders.

A topic particularly in focus in recent years were taxes, as there were several Member States introducing new sector specific taxes, which often included the banking sector, and were often referred to as 'windfall taxes’^[8]. Data indicates that banks’ tax expenses rose in many countries since 2022. Taking the simple average of the country specific results, taxes and similar payments rose by around 2 p.p. between 2022 and 2024 (tax and similar payments as share of profits before these payments^[9]).

Banks continue to invest in digitalisation and automatisation to limit long-term cost growth

Looking forward, RAQ results show that banks keep on targeting automatisation and digitalisation to reduce their operating expenses. This has a detrimental effect in the short-term profitability capacity as any investments towards automatisation and digitalisation add to immediate expenses, as do other ICT related expenses. The reduction of overhead and staff costs remains banks’ second most important measure to reduce their operating expenses, but with less relevance compared to previous years (56% agreement now vs. 80% agreement in 2021). Amid the relatively high staff expenses at cross-border universal banks, one might have expected that a particularly high share of them might aim for such cost reduction measures (see Box 7). However, the share of cross-border universal banks aiming for overhead and staff cost reductions is only around 10p.p. above the share of the full sample of banks in the RAQ results. This may indicate limited cost saving potential in this area for those banks (Figure 60).

During the last years, there has been a low number of bank related M&A transactions in the EU/EEA. Among these transactions domestic ones have the biggest share, followed by M&A within the EEA. Transactions with parties outside the EEA are even more rare. This confirms that the higher level of attractiveness of EEA internal M&As, than for transactions outside the EEA. It is an aspect, which is similarly reflected in the latest RAQ results on banks’ plans for M&A transactions. This might also be affected by the cost related issue described above, but also due to regulatory or similar hurdles and challenges^[10]. (Figure 61).

(*) Completed transactions – including whole company, minority, branches and assets acquisitions and / or mergers – involving a bank in the EEA as geography. Private equity deals are included. The volume related information / data is only available for some of the transactions, for which reason the number of deals might be considered as more relevant.

Abbreviations and acronyms