How strong European bank earnings boost optimism for 2025

Three key takeaways from European banks’ Q4 2024 results: 

1. Resilience in net interest income (NII)

European banks’ NII remained robust in Q4 2024, growing 5% year-on-year despite multiple rate cuts by central banks, including five by the European Central Bank and three by the Bank of England. However, this overall strength masked regional variations driven by differences in competitive dynamics, the pace of balance sheet repricing, and underlying business models.
 

Banks in the UK, France and Belgium saw notable improvements due to easing margin pressures previously weighed down by intense deposit price competition. Large banks with significant exposure to high-growth markets outside Europe also contributed to the overall increase. In contrast, Spain, Italy, Germany and the Nordics experienced declines in NII as loan pricing fell faster than deposit pricing, squeezing margins.
 

Looking ahead, major European central banks are expected to cut rates three to four times in 2025. Nonetheless, European banking NII is still projected to grow moderately by 1%, following Q4 regional trends. UK and French banks, alongside those with significant international exposure, are expected to benefit from rising bond portfolio contributions and loan expansion. In France, for example, regulatory constraints on deposit pricing (such as the Livret A rate) had previously stifled mortgage growth and profitability. Recent rate cuts have alleviated these pressures, leading to robust mortgage growth that is expected to continue into 2025.
 

Meanwhile, US banks³ also demonstrated resilience in NII, rising 1% year-on-year. The outlook for 2025 is even more positive, with several banks targeting mid-single-digit growth from rising bond portfolio contributions and loan growth.
 

2. Strong cyclical rebound in fee income

Investment banking revenues at both European and US banks reached their highest levels since 2009, driven by broad-based strength across fee-generating activities and trading operations. M&A and IPO fees increased by 32% compared to 2023, although they remain below their 10-year averages. Trading revenues were bolstered by heightened geopolitical tensions, increased market volatility, and shifts in global central bank monetary policies.

The outlook for investment banking in 2025 remains positive, underpinned by rising CEO confidence, increasing sponsor activity and an improving regulatory environment. This helped M&A pipelines reach their highest levels in seven years, signaling strong momentum for continued growth.

Wealth management revenues also grew in Q4, fueled by robust inflows and positive equity market performance. Clients shifted funds from deposits to investment products in response to central bank rate cuts. Furthermore, several banks are placing greater emphasis on expanding this capital-light revenue stream, particularly by deepening relationships with their mass affluent customer base, which typically has twice the product needs of mass-market peers. This creates significant opportunities for cross-selling financial advice and investment products that might otherwise be sourced outside the bank.

3. Positive operating leverage

European banks’ Q4 revenue growth outpaced cost growth by 6pp. While wage inflation pressures eased, alongside broader inflation moving closer to central bank targets, banks continued to face heightened spending requirements in technology, data, AI and risk management.
 

As these investments grow, banking leaders may face increasing pressure to demonstrate tangible returns, particularly in technology spending, as investors and regulators demand clearer evidence of value creation. The importance of managing market expectations was evident in the results, with banks signaling higher-than-anticipated spending, seeing their share prices fall by an average of 5pp relative to the European banks index on results day.
 

Looking ahead, three out of four European banks anticipate cost growth in 2025 to support technology modernization, risk management and business expansion initiatives, with consensus forecasts projecting the sector’s cost growth at 2%.
 

In contrast, US banks achieved higher operating leverage, leading to a notable reduction in absolute costs. Consensus forecasts project a modest 2% cost growth for 2025.
 

Outlook for 2025

European banks delivered resilient Q4 results, with average share prices outperforming the European banks index by 2pp on results day, as the 2025 outlook modestly exceeded pre-results expectations. Pre-provision profits were revised upward by around 2% compared to forecasts made at the start of the year.
 

As interest rates decline, the drivers of top-line growth are expected to shift from NII to fee income. Consensus forecasts project overall revenue growth of 2% for European banks, while US banks are anticipated to achieve stronger growth of 5%, supported by more favorable trends and a greater reliance on fee-based revenue.
 

This improved outlook should provide European banks with welcome breathing room to focus on executing strategic priorities, such as diversifying revenue streams and modernizing technology infrastructure.