European banks look more resilient than they did in 2008, says Morningstar
European banks are set to sustain significantly higher profitability compared with the past decade, according to Morningstar’s new European Banks Industry Landscape.
Morningstar forecasts a midcycle return on equity of 15%, up from the 10% average over the past decade. Despite interest rate uncertainty, structural improvements in net interest margins and operational efficiency underpin a positive long-term outlook.
Johann Scholtz, senior equity analyst at Morningstar, said: “European banks are no longer operating in the exceptionally difficult interest rate environment of the past decade. The return of positive rates has fundamentally improved the economics of deposit-taking, and we expect that benefit to persist even as interest rates fluctuate.
“What’s particularly interesting is that this isn’t a traditional growth story. European banking is a mature industry, but we believe investors are underappreciating the efficiency gains banks have achieved through digitalisation. As the burden of rising regulatory costs eases, these improvements should become increasingly visible in profitability, supporting higher returns without requiring significant loan growth.”
Key findings include:
- Profitability has structurally increased: Morningstar forecasts a 15% midcycle return on equity, compared with the 10% average over the past decade.
- Net interest margins are expected to remain elevated: Positive interest rates, cheaper funding and higher yields on new loans support profitability, although hedging will delay some benefits.
- Digitalisation is driving long-term efficiency gains: Branch and employee reductions have lowered costs, with Morningstar expecting these improvements to become increasingly visible in profitability.
- Banks could regain ground from fintech rivals: Declining fintech funding is reducing competition in payments and transactional banking, while asset and wealth management offer further fee growth opportunities.
- Commercial real estate remains the key credit risk: Higher refinancing costs, elevated vacancies and changing property demand pose challenges, although Morningstar expects broader credit quality to remain relatively resilient.
Find the full report here.