European Banks Poised to Maintain Low Cost of Risk in 2025

This commentary presents our 2025 outlook for European banks' cost of risk (COR) and discusses the insights derived from our sample of 50 banks across Europe.

Key highlights include:
-- European banks' COR improved in F2024, remaining significantly lower than F2019 to F2023 levels.
-- We note that most banks have already achieved their through-the-cycle COR run rate and have little scope for further improvement.
-- We expect European banks' COR to remain broadly stable in F2025, supported by lower interest rates and a gradual economic recovery in the absence of heightened geopolitical risks and higher inflationary pressures.

"As interest rates go down, we do not expect asset quality to deteriorate significantly, as it had not shown a major deterioration when rates experienced a sudden surge. This and a gradual economic recovery should support stable COR levels at European banks in F2025", said Maria Rivas, Senior Vice President and Sector Lead of European Financial Institution Ratings at Morningstar DBRS. "However, interest rates will remain high in comparison with the pre-F2022 ultra-low interest rate environment, which could lead to some asset quality deterioration, particularly in certain corporate sectors, and could cause some increase in provisioning levels".