Higher Tariffs Could Increase European Banks' Low Cost of Risk

This commentary presents an update of our 2025 outlook on European banks' cost of risk (COR) and discusses the 2024 analysis insights derived from our sample of 50 banks across Europe.

Key highlights include:
-- The increasingly uncertain macro environment, particularly in relation to U.S. tariffs, will likely translate into higher COR and Stage 2 loan levels in F2025. However, we still expect COR and Stage 2 loans to remain materially lower than the levels seen during the pandemic.

-- European banks reported low COR levels in F2024, similar to levels in H1 2024 and significantly lower than the levels seen from F2019 to F2023.

-- European banks still have management overlays that could be used to offset some of the potential higher provisions from the uncertain economic outlook.

"The widespread economic impact of U.S. tariff decisions on the COR levels and asset quality of European banks remains highly uncertain, and this is likely to increase COR and Stage 2 loans levels for European banks from F2024 levels", said Maria Rivas, Senior Vice President and Sector Lead, European Financial Institution Ratings at Morningstar DBRS. "However, we do not project that European banks will see a dramatic shift in either COR or Stage 2 loan levels this year, which we expect to remain materially lower than during the pandemic".