EU Banks See Highest Cost of Risk Since 2021 as Sector Stays Resilient

Key Takeaways

• Cost of Risk Peaks: EU/EEA banks’ cost of risk reached 57 basis points in Q1 2025, the highest since 2021 and well above the post-2021 average of 48 basis points.
• Capital Strength Maintained: The common equity tier 1 (CET1) ratio held steady at 16.2%, with risk-weighted assets totalling €9.9 trillion.
• Asset Growth Driven by Securities: Total sector assets rose 2.7% to €29 trillion, led by higher debt securities holdings and modest increases in cash balances.
• Stable Loan Quality: Non-performing loans remained at €377.8 billion, while Stage 2 loans declined proportionally to 9.5% of total loans.
• Liquidity Marginally Lower: Liquidity coverage and net stable funding ratios both fell slightly, with a shift in deposit composition towards non-bank financial institutions.

Deep Dive

The European Banking Authority’s (EBA) first-quarter 2025 Risk Dashboard shows the EU/EEA banking sector holding steady on capital and profitability, but with a notable rise in the cost of risk to its highest level in over three years.

Published on 11 August, the EBA’s aggregated data from the largest EU/EEA credit institutions places the sector’s cost of risk at 57 basis points, significantly above the post-2021 average of around 48 basis points. The regulator noted that the increase partly reflects a seasonal pattern of higher first-quarter readings, but it also marks a continuation of a gradual upward trend.

Despite this, the sector’s common equity tier 1 (CET1) ratio remained stable at 16.2%, with risk-weighted assets (RWAs) totaling €9.9 trillion. Operational risk grew in significance, now accounting for 12.9% of total RWAs.

Total assets rose to €29 trillion, up 2.7% from Q4 2024, driven by higher holdings of debt securities (14.6% of assets compared to 13.7% the previous quarter) and a modest increase in cash balances. Lending to households and non-financial corporates expanded by nearly 1%, supported by mortgage activity and small and medium enterprise (SME) loans.

Non-performing loans (NPLs) held steady at €377.8 billion, while Stage 2 loans decreased proportionally to 9.5% of total loans. Profitability was largely unchanged, with return on equity (RoE) at 10.5% and return on assets at 0.73%. The net interest margin (NIM) narrowed to 1.6%, but this was offset by asset growth and a 6% year-on-year increase in net fee and commission income.

Liquidity positions eased slightly, with the liquidity coverage ratio (LCR) falling to 159.5% and the net stable funding ratio (NSFR) slipping to 126.9%. The loan-to-deposit ratio for households and non-financial corporates rose to 106.3%, as deposits in these segments declined 0.5%, while deposits from other customers, including non-bank financial institutions, grew 9.4%.

While the EBA’s data points to continued resilience, the cost of risk’s climb to its highest level since 2021 signals an important pressure point for banks as they navigate 2025’s economic and market conditions.

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