This report does not constitute a rating action.

The European macroeconomic outlook is subject to elevated uncertainty. An increase in U.S. trade tariffs poses the most prominent source of downside risk.

Our stress test revealed that additional credit losses from corporate sectors that are most at risk due to their reliance on U.S. trade could reduce median pretax profits by 17%-29%, with significant variations around this median. Importantly, we found that only a handful of rated banks would be exposed to more material effects.

We believe our stress test findings support our assessment that European banks have improved their resilience to credit risks substantially. They also underpin our expectation that upcoming regulatory stress tests conducted by authorities will likely reach similar conclusions.

Despite several macro-financial shocks, European banks' asset quality has not deteriorated meaningfully in recent years. In line with our expectations, credit risks have so far only materialized in a meaningful way in Austria, Germany, and Luxembourg, and were concentrated on commercial real estate (CRE) and small and midsize enterprise (SME) portfolios.

Continuing positive developments in several countries more than offset these sporadic negative trends. Nonperforming loan (NPL) stocks continued to decline, with large EU banks' NPL ratios reaching a cyclical low of about 2% at year-end 2024.

In their base case, S&P Global Ratings' economists forecast sluggish European economic growth in 2025 and a more significant rebound in 2026. Even though banks might struggle to achieve their lending growth ambitions this year due to low credit demand, asset quality is unlikely to deteriorate materially.

This is because of still low real interest rates and accommodative fiscal policies that support borrowers' repayment capacity. What's more, we expect European consumer spending and employment rates will remain resilient. Additionally, we consider it unlikely that banks will loosen their underwriting standards.

Rising Trade Tensions Could Moderately Reduce Profits

The three scenarios in our stress test outline potential credit losses and the resulting reduction in pretax profits for a sample of 90 rated European banks (see table 4). Our analysis only covers the direct effects of trade tensions on selected corporate loan exposures and assumes no offsetting factors--meaning no change in loan exposures and no specific fiscal support programs for at-risk corporate sectors. It also does not include existing government guarantees that could cover parts of the stressed corporate portfolios.

We modelled loss rates based on EU banks' submissions in the 2023 European Banking Authority (EBA) stress test, which required banks to estimate loss rates under an adverse macro-financial scenario at a sectoral level (see appendix). We have applied lower/higher stressed loss rates to banks that are active in lower-/higher-risk countries, according to our banking industry country risk assessment (BICRA).

Based on our stress test, the median reduction in annual pretax profits is 17%-29% (see chart 1). The most pronounced reduction corresponds to scenario 3, where we envisage countertariffs and the escalation of trade tensions to key services sectors. Importantly, no bank would record annual losses in any of our three scenarios. The effect on profits would be material only for a handful of rated banks, whose pretax profits would reduce by around 60% or more (see table 2 and appendix).

Overall, the most pronounced effects on these banks result from a combination of:

• Relatively higher exposure to corporate sectors to which we applied higher loss rates;
• Relatively large size of the loan book compared with total assets;
• Relatively lower expected profitability in 2025; and
• Relatively higher economic risk (from our BICRA) in the countries where the banks operate.

Table 1

Potential loss rates in the case of rising trade tensions
Scenario	Description	Stressed sectors	Median increase in cost of risk (%)	Median reduction in 2025f pretax profit (%)
Scenario 1	U.S. tariffs on goods affect the credit quality in economic sectors most reliant on exports to the U.S. market.	A Agriculture, forestry, and fishing; B mining and quarrying; C manufacturing; G wholesale and retail trade; H transport and storage	0.32	17
Scenario 2	The EU's retaliatory tariffs on goods increase asset quality pressures for economic sectors most reliant on imports from the U.S.	Scenario 1 + D electricity, gas, steam, and air conditioning supply; E water supply; F construction	0.46	24
Scenario 3	Trade tensions escalate further and embroil key services sectors that are most reliant on U.S. trade.	Scenario 2 + J information and communication; K financial and insurance activities; M professional, scientific, and technical activities; R arts, entertainment, and recreation	0.56	29
Sectoral classification as per the EU NACE categories. Source: S&P Global Ratings.

Chart 1

Table 2

Only a handful of banks face more material effects from rising corporate loan losses due to trade tensions
		2025f				Scenario analysis--reduction in 2025f pretax profits (%)
Bank	Currency	Pretax profit (mil.)	Credit loss provisions (mil.)	Preprovision operating income (mil.)	PPI / credit loss provisions (x)	Scenario 1	Scenario 2	Scenario 3
DLR Kredit A/S	DKK	1,387	20	1,407	70.4	73	80	83
Cooperatieve Rabobank U.A.	EUR	6,445	650	7,095	10.9	62	67	70
Commerzbank AG	EUR	3,100	850	4,650	5.5	50	61	69
BPCE	EUR	5,630	2,200	7,830	3.6	30	43	65
Groupe Credit Agricole	EUR	12,169	3,500	15,669	4.5	40	48	59
DKK--Danish krone. f--Forecast. PPI—Pre-Provision Income. Source: S&P Global Ratings.

Most Banks Could Also Manage A Spillover Of Trade Tensions To Retail Portfolios

In addition to the direct effects of trade tensions on corporate portfolios, we have also assessed the potential effects of a broader spillover on the quality of banks' retail portfolios.

Under this hypothetical scenario, we applied loss rates to each bank's mortgage and consumer loan portfolios derived from EU banks' submissions to the latest EBA stress test, in addition to the loss rates on corporate sectors applied under Scenario 3. In this hypothetical scenario, the median reduction in projected 2025 pretax profits would rise to 66%, indicating a material loss for most rated European banks (see chart 2).

Chart 2

Importantly, this hypothetical scenario also shows that European banks have strengthened their financial resilience to credit risk over time. After applying the same additional credit losses to rated banks' pretax profits from 2021--the year before interest rates and most banks' profits rose--we found the median reduction in 2021 pretax profits would have been 105%. Additionally, the already low number of banks facing significant effects has reduced meaningfully since 2021.

Asset Quality Resisted The Macro Slowdown

The inflation shock, the subsequent rise in nominal interest rates induced by central banks, and the slowdown in economic growth did not affect European banks' asset quality metrics in the past three years. At the system level, stage 2 and stage 3 ratios have been remarkably resilient in the past three years (see chart 3). This is due to a combination of cyclical and structural factors.

Chart 3

Cyclical factors

Negative real interest rates: Despite higher nominal interest rates, real interest rates have remained negative or low in key jurisdictions due to above-average inflation (see chart 4). Bank financing conditions therefore remained broadly favorable for most borrowers, particularly for those that managed to pass through higher prices to customers. Previous periods of material asset quality deterioration were typically associated with significantly higher real interest rates.

Chart 4

Still supportive fiscal environment in many jurisdictions: Several government initiatives have mitigated the effects of higher energy prices and the ensuing increase in inflation. We believe this direct support also benefited borrower repayment capacity and, with that, bank asset quality.

That said, the ensuing rise in public debt in some countries and fiscal consolidation challenges are now weighing on the outlook for some sovereign ratings, such as France and Belgium.

Structural factors

Resilient consumer spending and labor markets: European labor markets continue to experience a soft landing, with a gradual slowdown in job openings but no meaningful rise in unemployment yet. At the same time, consumer spending picked up in 2024 and rising real incomes point to a continuation of this trend.

Lower appetite for credit risk and better credit risk management practices: In several European countries, loan growth has been flat or negative in recent years. For the riskiest sectors, such as CRE, loan growth was also very limited and focused on senior secured positions with known customers. Overall, we believe European banks have strengthened their underwriting standards. The introduction of international financial reporting standard (IFRS) 9 and stricter guidance from supervisors has also helped raise the quality of credit risk management.

Asset Quality Deterioration Is Focused On Specific Portfolios

At a more granular level, the only negative outliers are some banks in Germany, Austria, and Luxembourg, as well as CRE and SME portfolios. That said, asset quality deterioration was limited in recent years (see charts 5 and 6).

Germany, Austria, and Luxembourg were most affected by the economic slowdown from the war in Ukraine, energy price shocks, and the price correction in the real estate market. As for CRE and SME portfolios, these are typically very vulnerable during economic slowdowns. As such, the current trends are in line with our expectations at the beginning of the economic slowdown and reflect mainly cyclical factors. In our portfolio of rated European banks, we currently assign negative outlooks directly related to asset quality deterioration to the ratings on Banque Internationale à Luxembourg and Hypo Vorarlberg Bank AG.

Chart 5

Chart 6

Overall asset quality metrics in Germany, Austria, and Luxembourg remain close to EU averages, indicating a normalization rather than a deviation from regional trends. We note a higher degree of divergence in the distribution of stage 2 ratios. That said, we believe the ratios are not fully comparable across banks, despite supervisory efforts to align practices.

Chart 7

Our Base Case Foresees A Stabilization Of Asset Quality

Our economists revised down their macro forecasts following the rise in global trade tensions in early April 2025. For the eurozone, they now expect lower but still positive annual GDP growth, with steady unemployment rates that will support the resilience of the labor market. In 2026, economic growth should accelerate, primarily on the back of higher defense spending in core eurozone countries.

This means the main cyclical factors supporting asset quality will remain in play over 2025-2026. Concretely, real interest rates will remain low and fiscal policies will continue to be favorable, albeit at varying degrees: Fiscal spending will be relatively higher in Germany but lower in France and Belgium, which are undergoing excessive deficit procedures.

Against this broader macroeconomic context and provided European banks will not relax their credit underwriting standards any time soon, our base case assumes asset quality metrics will remain stable and hover around their current cyclical lows (see charts 8 and 9).

Chart 8

Chart 9

Importantly, most European banks' profitability has increased significantly in recent years, largely due to more favorable nominal interest rates. This means banks have now more capacity to absorb higher credit losses from current earnings, without having to deplete capital (see chart 10).

For the 170 European banks we rate, we expect credit costs will represent a median of only 11% of pre-provision income. Accordingly, banks could absorb a significant increase in credit costs before their earnings turn negative.

Chart 10

Appendix

Overview of our stress test exercise

Loss rates. Our stress test estimates the sensitivity of banks' profits, based on forecast 2025 pretax profits, to higher credit losses resulting from asset quality deterioration in specific corporate sectors.

These loss rates were modelled by banks for each sector under the adverse macro-financial scenario laid out by the EBA (see table 3). The lower bound corresponds to the 25th percentile and the upper bound to the 75th percentile in the distribution of annual loss rates modelled by EU banks participating in the 2023 EBA stress test.

We have annualized the loss rates because the EBA results reflected three-year cumulative loss rates. The EBA adverse scenario assumed a cumulative GDP decline in the eurozone of 5.9% over three years, with unemployment reaching 12.4% at the end of the third year.

The loss rates that we applied in our stress test for a given bank and portfolio vary, depending on the weighted average economic risk (WAER) of the bank's credit exposures. For banks with a WAER of 1, the applied loss rate was set at the lower bound, and increased linearly toward the upper bound for banks with higher WAERs.

Balance sheet assumption. We applied the loss rates to banks' portfolios as of end 2024. We did not assume any change in the composition of the loan book nor any other risk mitigating factor, for example fiscal measures to support specific sectors. We did not include the impact of government guarantees which could cover specific parts of stressed portfolios. We did not adjust loss rates for the initial level of the baseline risk cost forecast for 2025 or the existence of provision overlays for specific banks.

Table 3

Modelled additional loss rates per portfolio and sector, derived from the 2023 EBA stress test results
Portfolio	Lower bound	Upper bound
Household	1.00	2.33
Of which mortgage loans	0.67	2.00
Of which consumer loans	1.33	3.33
A Agriculture, forestry and fishing	2.00	4.00
B Mining and quarrying	1.00	3.0
C Manufacturing	1.67	3.33
D Electricity, gas, steam, and air conditioning supply	1.00	2.00
E Water supply	0.67	2.33
F Construction	2.00	4.33
G Wholesale and retail trade	1.33	3.33
H Transport and storage	1.33	3.00
J Information and communication	1.00	2.33
K Financial and insurance activities	0.67	2.00
M Professional, scientific, and technical activities	1.67	3.33
R Arts, entertainment, and recreation	1.33	3.67
Sectoral classification as per the EU NACE categories. CRE--Commercial real estate. EBA--European Banking Authority. SME--Small and midsize enterprises. Sources: European Banking Authority, S&P Global Ratings.

Overview of stress test results

Scenario 1 

Chart 11

Chart 12

Scenario 2 

Chart 13

Chart 14

Scenario 3 

Chart 15

Chart 16

Detailed stress test results

Table 4

Detailed stress test results
Bank	Currency	2025f				Scenario analysis--reduction in 2025f pretax profits (%)
		Pretax profit (mil.)	Credit loss provisions (mil.)	Preprovision operating income (mil.)	PPI / credit loss provisions (x)	Scenario 1	Scenario 2	Scenario 3
Abanca Corporacion Bancaria S.A	EUR	804	120	938	7.8	31	42	52
ABN AMRO Bank N.V.	EUR	2,800	300	3,100	10.3	2	24	38
AIB Group (U.K.) PLC	GBP	178	20	208	10.4	9	14	17
AIB Group PLC	EUR	1,947	185	2,232	12.1	8	14	16
Aktia Bank PLC	EUR	108	8	116	14.5	5	9	25
Banca Mediolanum	EUR	1,125	50	1,250	25	0	1	1
Banca Popolare di Sondrio SpA	EUR	767	200	867	4.3	34	44	52
Banco Bilbao Vizcaya Argentaria S.A.	EUR	14,672	6,000	21,197	3.5	23	28	31
Banco BPI S.A.	EUR	691	60	766	12.8	16	20	22
Banco BPM	EUR	2,561	600	3,161	5.3	35	43	49
Banco Comercial Portugues S.A.	EUR	1,428	320	2,188	6.8	16	20	23
Banco de Sabadell S.A.	EUR	2,303	800	3,253	4.1	28	37	46
Banco Santander S.A.	EUR	18,413	12,500	34,383	2.8	23	28	32
Banco Santander Totta S.A.	EUR	1,254	90	1,344	14.9	13	16	18
Bank of Cyprus Public Co. Ltd.	EUR	471	85	576	6.8	12	16	19
Bank of Ireland Group PLC	EUR	1,630	210	1,940	9.2	14	15	17
Bank of Valletta PLC	EUR	233	10	243	24.3	10	15	20
Bank Polska Kasa Opieki S.A.	PLN	8,228	900	9,528	10.6	14	17	19
Bankinter S.A.	EUR	1,354	310	1,767	5.7	26	36	45
Banque Internationale a Luxembourg	EUR	168	40	208	5.2	12	35	43
Barclays PLC	GBP	8,817	2,100	11,387	5.4	7	9	11
Basler Kantonalbank	CHF	191	8	265	33.1	10	13	16
Belfius Bank SA/NV	EUR	1,401	70	1,471	21	19	35	50
BKS Bank AG	EUR	173	30	203	6.8	19	33	41
BNP Paribas	EUR	17,486	3,600	21,086	5.9	29	36	43
BPCE	EUR	5,630	2,200	7,830	3.6	30	43	65
Caisse Centrale du Credit Mutuel	EUR	6,636	2,200	8,762	4	25	33	47
Caixa Geral de Depositos S.A.	EUR	2,047	150	2,272	15.1	9	13	14
CaixaBank, S.A.	EUR	7,640	1,100	9,280	8.4	21	29	36
Ceska Sporitelna, a.s.	CZK	29,959	700	30,659	43.8	8	10	10
Ceskoslovenska Obchodni Banka A.S.	CZK	18,306	500	18,806	37.6	23	31	32
Commerzbank AG	EUR	3,100	850	4,650	5.5	50	61	69
Cooperatieve Rabobank U.A.	EUR	6,445	650	7,095	10.9	62	67	70
Crelan S.A.	EUR	242	30	278	9.3	17	25	33
Danske Bank A/S	DKK	28,657	1,000	29,718	29.7	16	20	25
De Volksbank N.V.	EUR	390	25	415	16.6	0	3	6
Deutsche Bank AG	EUR	9,436	1,500	11,236	7.5	16	18	28
Deutsche Pfandbriefbank AG	EUR	103	115	218	1.9	2	11	14
DLR Kredit A/S	DKK	1,387	20	1,407	70.4	73	80	83
DNB Bank ASA	NOK	55,839	1,800	57,639	32	10	16	20
DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt am Main	EUR	2,578	525	3,103	5.9	18	26	29
Erste Group Bank AG	EUR	5,391	550	6,091	11.1	23	33	36
Eurobank S.A	EUR	1,772	330	2,152	6.5	32	39	42
FinecoBank S.p.A.	EUR	828	3	871	290.5	0	0	0
Gorenjska Banka d.d.	EUR	43	6	49	8.2	34	45	50
Graubuendner Kantonalbank	CHF	227	1	228	228.3	12	18	29
Groupe Credit Agricole	EUR	12,169	3,500	15,669	4.5	40	48	59
HSBC Holdings PLC	USD	27,846	4,250	34,846	8.2	20	25	29
Ibercaja Banco S.A.	EUR	453	92	570	6.2	25	34	39
Iccrea Banca SpA	EUR	1,934	550	2,484	4.5	32	42	45
ING Groep N.V.	EUR	8,254	1,300	9,780	7.5	34	42	48
Intesa Sanpaolo SpA	EUR	13,454	1,600	15,404	9.6	19	24	30
Islandsbanki hf	ISK	30,569	2,000	32,569	16.3	1	30	32
Jyske Bank A/S	DKK	5,664	220	5,884	26.7	16	23	26
KBC Group N.V.	EUR	3,973	270	4,413	16.3	23	30	37
Klarna Bank AB	SEK	511	6,800	7,311	1.1	8	8	8
Knab N.V.	EUR	97	6	103	17.2	2	3	3
Komercni Banka A.S.	CZK	16,582	2,000	18,582	9.3	27	33	36
Landsbankinn hf.	ISK	46,151	4,500	50,651	11.3	20	31	34
Lansforsakringar Bank	SEK	2,210	180	2,780	15.4	7	12	13
LGT Bank AG	CHF	309	3	358	119.3	0	2	4
Lloyds Banking Group PLC	GBP	6,574	1,100	8,174	7.4	8	11	14
mBank S.A.	PLN	3,005	800	6,805	8.5	23	31	36
Mediobanca SpA	EUR	1,753	260	2,043	7.9	9	12	20
National Bank of Greece S.A.	EUR	1,527	200	1,737	8.7	28	35	37
Nationwide Building Society	GBP	1,762	380	2,642	7	0	1	1
NatWest Group PLC	GBP	6,899	700	7,749	11.1	13	19	23
NIBC Bank N.V.	EUR	218	20	238	11.9	10	16	24
Nordea Bank Abp	EUR	5,984	200	6,184	30.9	13	17	23
Nova Ljubljanska Banka D.D.	EUR	570	50	623	12.5	24	32	35
Nykredit Realkredit A/S	DKK	15,518	250	15,768	63.1	11	14	16
Oma Savings Bank PLC	EUR	92	35	127	3.6	8	12	16
OTP Bank PLC	HUF	1,586,486	100,000	1,686,486	16.9	12	16	17
Piraeus Bank S.A.	EUR	1,400	310	1,710	5.5	32	43	48
Raiffeisen Bank International AG	EUR	2,102	500	2,902	5.8	27	31	39
RCI Banque	EUR	1,360	205	1,565	7.6	35	40	42
Santander Consumer Bank AG	EUR	363	230	593	2.6	29	31	34
Santander UK Group Holdings PLC	GBP	1,609	250	2,324	9.3	2	3	12
SBAB Bank AB (publ)	SEK	2,754	50	3,383	67.7	1	2	2
S-Bank PLC	EUR	141	26	167	6.4	0	0	0
Skandinaviska Enskilda Banken AB (publ)	SEK	43,595	1,400	44,995	32.1	14	18	26
Societe Generale	EUR	7,307	1,600	9,207	5.8	27	33	41
Svenska Handelsbanken AB	SEK	29,605	400	32,205	80.5	4	8	12
Swedbank AB	SEK	36,995	1,250	40,445	32.4	6	8	10
UniCredit Bank Austria AG	EUR	1,261	80	1,434	17.9	20	30	41
UniCredit Bank GmbH	EUR	2,305	300	2,605	8.7	30	37	43
UniCredit SpA	EUR	12,437	1,300	14,737	11.3	25	31	37
Van Lanschot Kempen N.V.	EUR	206	10	216	21.6	1	1	4
Virgin Money UK PLC	GBP	486	225	791	3.5	18	21	25
Volkswagen Bank GmbH	EUR	807	130	937	7.2	44	49	54
CHF--Swiss franc. CZK--Czech koruna. DKK--Danish krone. f--Forecast. ISK--Icelandic króna. NOK--Norwegian krone. PLN--Polish zloty. PPI—Pre-Provision Income. SEK--Swedish krona. Source: S&P Global Ratings.

Primary Contacts:	Nicolas Charnay, Paris 33623748591; nicolas.charnay@spglobal.com
	Giles Edwards, London 44-20-7176-7014; giles.edwards@spglobal.com
	Osman Sattar, FCA, London 44-20-7176-7198; osman.sattar@spglobal.com
	Karim Kroll, Frankfurt 49-69-33999-169; karim.kroll@spglobal.com
Secondary Contacts:	Elena Iparraguirre, Madrid 34-91-389-6963; elena.iparraguirre@spglobal.com
	Mirko Sanna, Milan 390272111275; mirko.sanna@spglobal.com
	Benjamin Heinrich, CFA, FRM, Frankfurt 49-69-33999-167; benjamin.heinrich@spglobal.com
	Nicolas Malaterre, Paris 33-14-420-7324; nicolas.malaterre@spglobal.com
	Richard Barnes, London 44-20-7176-7227; richard.barnes@spglobal.com