As the European Central Bank (ECB) pivots into an easing phase, net interest margins (NIM) are sliding from 2023’s peaks. With credit costs still benign, banks are leaning harder on fees and commissions, while cost discipline and strong capital give them breathing room. Here’s what’s really driving P&Ls—and which countries stand out.
The set-up: rate cuts compress NIM, but credit costs stay tame
The ECB’s June move took the deposit facility rate to 2.0%, signaling the start of an easing cycle that tends to pressure asset yields faster than deposit costs re-price downward—a classic squeeze on NIM. Supervisory snapshots confirm the turn: the European Banking Authority’s (EBA) Q1-2025 data show sector NIM down about 5 bps quarter-on-quarter to ~1.6%, continuing a gentle drift lower from 2024’s highs. Profitability remains solid, however, because cost of risk is still low and fee engines are kicking in. (Reuters, European Banking Authority)
This macro backdrop helps explain a striking 2Q-2025 pattern: many large banks reported resilient earnings despite softer lending income, with fee income and lower provisions doing more of the heavy lifting. ING flagged that lower policy rates are feeding through to interest income—yet reiterated a constructive income outlook, explicitly citing fees as a stabilizer. (Reuters)
Where fee growth is coming from
1) Payments and transaction banking
At scale players, transaction fees are proving cycle-resilient. BNP Paribas pointed to “strong growth in transaction fees in all regions” in Q2, with Wealth Management adding deposit-related fee income even as lower rates trimmed margins. In Corporate & Institutional Banking, cash management and payments stayed robust alongside active capital-markets desks. (BNP Paribas, invest.bnpparibas)
2) Wealth & asset management
With market levels still supportive and deposit spreads narrower, banks are nudging savings into funds, advisory, and insurance wrappers. Intesa Sanpaolo’s H1 release is explicit: net fee and commission income +4.7% year-on-year, led by Wealth Management, Protection & Advisory, helping offset a decline in net interest income. Management highlighted record commissions and insurance income alongside best-in-class efficiency. (Intesa Sanpaolo Group)
3) Cards & retail fees
In diversified retail groups, card and account fees are steady contributors. Santander’s Q2 beat leaned on higher fee income (+2.4% y/y) to counter a small dip in lending income, underlining the value of fee granularity when rates roll over. (Reuters)
So what? In this phase of the cycle, fee engines are the new buffer. They won’t fully replace 2023’s peak NIM, but they can smooth earnings while rates descend—especially where banks have scale in payments, affluent customers, and cross-sell capacity.
Provisions: still low—and sometimes falling
The other cushion has been benign credit costs. BNP Paribas kept stage-3 provisions contained in Q2 (coverage ~69% on an NPL ratio of 1.6%), and its overall cost of risk ran ~38 bps—still low by historical standards. Surveys back this up: the EBA’s spring risk assessment found roughly 90% of banks expect sub-50 bps cost of risk for the current year, with half expecting below 25 bps. Santander likewise reported lower provisions quarter-on-quarter, boosting profitability despite modest lending-income pressure. (invest.bnpparibas, European Banking Authority, Reuters)
That said, country pockets exist—e.g., lingering Swiss-franc mortgage litigation in some CEE subsidiaries or commercial-real-estate hotspots—but the aggregate picture across large EU banks remains of contained impairment charges and little evidence of a broad credit turn.
Cost discipline: the quiet engine of 2025
With NIM drifting and provisions capped, cost-to-income is the lever management can control:
- Société Générale raised its 2025 RoTE target and guided to a cost-to-income ratio below 65% this year—part of a broader turnaround emphasizing opex control and a rebound in retail. (Reuters)
- BNP Paribas continues to push a €2.7bn 2022–2025 savings plan, adding automation and shared services to protect jaws. (Reuters)
- Intesa Sanpaolo showcased record efficiency (cost/income ~38% in H1), reflecting a long-running mix shift toward wealth/insurance and relentless process optimization. (Intesa Sanpaolo Group)
The operational logic is common: use fees to offset falling NIM; use costs to protect returns.
Capital and payouts: still generous, still selective
Capital cushions remain thick. UniCredit ended Q2 with a pro-forma CET1 of ~16.2%, supporting hefty distributions (2025–2027 target ≥€30bn, at least half in cash), while Intesa reported CET1 ~13–13.5% and upgraded its 2025 profit goal “well above” €9bn. BNP Paribas reiterates a 60% payout framework and introduced an interim dividend tied to H1 EPS. Santander sits around 13% CET1 and launched another €1.7bn buyback—about a quarter of H1 profit. (UnicreditGroup.eu, Intesa Sanpaolo Group, invest.bnpparibas, santander.com)
Translation: Even as NIM softens, payout capacity is intact at many flagships thanks to strong capital and earnings diversity. Supervisors, meanwhile, keep nudging banks on SREP and risk controls, but sector capital headroom still looks comfortable. (Reuters)
Country standouts: who looks best positioned?
Italy (Intesa Sanpaolo, UniCredit)
Italy is the poster child for the 2025 mix: fee engines up, costs tight, capital strong. Intesa’s H1 featured record commissions, top-tier efficiency, and upgraded guidance; UniCredit maintained high CET1 and reiterated rich distribution ambitions. (Intesa Sanpaolo Group, UnicreditGroup.eu)
Spain (Santander, BBVA)
Spanish groups are more globally diversified. Santander offset lower lending income with fees and lower provisions while continuing buybacks; BBVA saw lower lending income and FX headwinds but highlighted a bigger CIB contribution and high-teens ROTE. (Reuters)
France (BNP Paribas, Société Générale)
BNP delivered transaction-fee growth and kept credit costs in check; SocGen’s plan sharpened cost targets and nudged RoTE higher. France looks like a steady fee-plus-cost story as rates fall. (BNP Paribas, Reuters)
Netherlands (ING)
ING flagged the rate impact on interest income yet guided positively, leaning on fees and a diversified client franchise to stabilize earnings. (Reuters)
United Kingdom (NatWest, Barclays, Lloyds)
BoE easing likewise squeezes UK NIM, but UK banks are leaning on costs, capital returns, and diversified fee pools. NatWest upgraded 2025 guidance and declared a 9.5p interim dividend plus a £750m buyback; Barclays rode strong markets income with a £1bn buyback; Lloyds reaffirmed guidance and maintained a robust dividend stance even as regulatory overhangs (e.g., motor-finance) persist. (natwestgroup.com, Financial Times, Morningstar)
The moving parts for H2-2025
1) Deposit beta and pass-through. As policy rates drift lower, how quickly banks re-price deposits—especially non-operational and term buckets—will shape NIM. Expect a faster pass-through than in the hiking phase, but banks will try to protect spreads via mix management and product design. ECB and EBA dashboards should show incremental NIM compression but not a cliff. (European Banking Authority)
2) Fee durability. Wealth & asset-management fees track AUM levels and flows; payments and transaction banking follow activity volumes. Corporate fee pools (advisory, underwriting) are sensitive to capital-markets windows, which were relatively supportive in Q2. Monitor quarterly fee lines at BNP, Intesa, and Santander for confirmation. (BNP Paribas, Intesa Sanpaolo Group, Reuters)
3) Cost of risk. Baseline: low. Watch SMEs/CRE in specific geographies and any tariff-driven growth shocks. For now, both reported provisions and surveys point to sub-50 bps cost of risk for most banks in 2025. (invest.bnpparibas, European Banking Authority)
4) Capital and payouts. With strong CET1, dividends and buybacks look well-supported—subject to supervisors’ SREP outcomes and macro shocks. BNP’s 60% payout template, UniCredit’s multi-year plan, Intesa’s upgrades, and Santander’s buyback cadence set the tone. (invest.bnpparibas, UnicreditGroup.eu, Intesa Sanpaolo Group, santander.com)
The narrative for investors and readers (non-advisory)
If 2023 was the NIM windfall year, 2025 is the remix:
- Fees (payments/transaction, wealth/insurance) take center stage.
- Costs are the fulcrum—banks protect RoTE by grinding opex.
- Provisions stay low, cushioning the NIM downshift.
- Capital returns remain generous at many names, reinforcing total-return potential even as top-line lends less of a boost.
Risks? A sharper growth slowdown could pinch activity-based fees and loan growth; FX matters for Spanish groups with LatAm exposure; and policy whiplash (tariffs, bank levies, or rapid-fire rate moves) could jolt earnings mixes. Still, the base case across much of Europe remains orderly normalization, not stress.
Quick reference: who’s doing what (selected datapoints)
- ECB policy: Deposit facility 2.0% after June cut; markets see a gradual path. (Reuters)
- Sector NIM: EBA Q1-2025 shows ~1.6%, drifting lower; profitability still double-digit RoE. (European Banking Authority)
- BNP Paribas: Q2 fee momentum in transaction banking & wealth; cost of risk ~38 bps, stage-3 coverage ~69%. (BNP Paribas, invest.bnpparibas)
- Intesa Sanpaolo: H1 net fees +4.7%, record commissions; CET1 ~13–13.5%; upgraded profit guidance. (Intesa Sanpaolo Group)
- Santander: Q2 fees +2.4%, lower provisions; €1.7bn buyback; CET1 ~13%. (Reuters)
- SocGen: 2025 RoTE target ~9%, cost/income <65% as retail rebounds. (Reuters)
- ING: Results beat with commentary that lower rates weigh on NII, but fee growth supports income. (Reuters)
What to watch next
- Fee line granularity in Q3 (payments volumes, wealth inflows, fund margins).
- Deposit mix shifts as cuts progress—watch retail term vs. sight balances.
- EBA/ECB updates on NIM, cost of risk, and NPLs; any rise in Stage-2 exposures would be an early warning. (European Banking Authority)
- Capital-return calendars (interim dividends, buyback executions) and SREP disclosures into year-end. (Reuters)
Sources (selected)
- ECB rate cut to 2.0% (deposit facility), June 2025; ECB supervisory statistics Q1-2025; EBA Risk Dashboard & Q1-2025 release. (Reuters, bankingsupervision.europa.eu, European Banking Authority)
- EBA supervisory data Q1-2025: sector NIM trend and profitability context. (European Banking Authority)
- BNP Paribas Q2-2025 press & slide deck: fee growth, provisions, coverage ratios. (invest.bnpparibas, BNP Paribas)
- Santander Q2-2025: fees offset lower lending income; buyback; CET1 level. (Reuters)
- Intesa Sanpaolo H1-2025: fees +4.7%; CET1 and guidance upgrades. (Intesa Sanpaolo Group)
- Société Générale cost/income & RoTE target upgrade. (Reuters)
- ING Q2-2025: income mix and rate commentary. (Reuters)
Reader checklist (educational, not advice)
- Check your bank’s fee engines: Look for payments/transaction, wealth/insurance, and markets contributions in the notes—are they growing as NIM fades? (Result presentations usually break these out.)
- Cost discipline matters: Track cost-to-income trends and stated savings programs—these often drive RoTE resilience when rates fall.
- Watch capital & distributions: CET1 buffers and stated payout frameworks (dividends/buybacks) can underpin returns even if revenue slows—subject to SREP outcomes.
- Follow credit quality: Cost of risk is low, but keep an eye on Stage-2 migrations or sector-specific pockets (e.g., CRE, SMEs).
Disclosure
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