“The normalisation of net interest margins is tailing off and we expect earnings to be supported by recovering loan growth, strong expansion of fee income, declining cost inflation and modest credit losses. We do foresee a moderate pick-up in default rates, but this will not materially impact credit quality. Capital headroom will cushion the downside,” said Marco Troiano, head of financial institutions ratings.

Our rating outlooks are largely stable, reflecting our expectation that banks are well positioned to weather expected deterioration in the credit cycle. “Positive factors for our bank ratings include higher for longer interest rates and the prospect for stronger economic growth. The bank M&A story will extend into 2026. Well executed M&A can also be an accelerator of performance as it bolsters scale, market position, and diversification,” Troiano said.

“But there are risks to our ratings,” Troiano cautioned. “A trade war and geopolitical spillovers could dampen economic performance and cause asset-price corrections. Political instability, meanwhile, could crimp lending and drive wholesale funding costs higher.”

Nonetheless, we believe European banks will remain highly profitable, with average RoE in double digits. Core Europe banks – German and French in particular – will gradually converge towards the EU average.

Profitability will be supported by several factors:

• A stabilisation of net interest margins at a high level
• A pick-up in loan growth, albeit with regional differences
• Higher fee and commission income
• A slowdown in costs. Under our base case, the median cost/income ratio will remain below 53%
• An improved picture for cost of risk (although we do expect a moderate pick up from the second half of 2026).

Banks will maintain comfortable P&L buffers to cover credit losses. Credit provisions continue to be low across Europe. We have fewer concerns about credit deterioration in the euro area. Our baseline expectation continues to be for a moderate deterioration given the uncertain economic outlook, although loan performance has been resilient and banks’ expectations regarding future credit quality have improved, including in commercial real estate.

When it comes to the impetus behind regulatory simplification, we are favourable in principle where there are obvious redundancies, or where current requirements have proven ineffective and have become a burden. But bank capital is a complex matter and there are limits to what simplification can achieve without giving up on some policy objectives.

There is a healthy debate on the effectiveness of Additional Tier 1 instruments as going-concern capital, considering the evidence of 10 years during which they have rarely, if ever, served that purpose. Buffer requirements and whether they can be released to meet policy objectives is another interesting area. Defining releasable versus non releasable buffers could help the market price risks more effectively.

Well calibrated simplification could improve market efficiency through better transparency and enhanced accountability as incentives shift from mere compliance to genuine risk ownership. But the benefits of a simpler framework are counterbalanced by risks of deregulation. However, a race to the bottom in global banking regulation remains a tail risk, in our view.

Download the Banking Outlook 2026 here.