## Executive Summary

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---

### Key findings
- Rapid hikes in monetary policy rates transmitted more slowly to banks deposit rates than to loan rates, leading to a sharp pickup in European bank net interest margins in 2023.
- Combined with resilient asset quality, wider net interest margins supported record profits for European banks, helping them recover back to levels last seen in the years preceding the Global Financial Crisis.
- Several policy initiatives were introduced in response to the boom in bank profits, including windfall taxes on excess profits or other taxes on banks, lower remuneration on minimum reserves, and initiatives encouraging higher, taxable dividend payouts.
- Projections based on historical balance sheets and income statements for over 2,500 European banks indicate:
  - Abnormally high profits will start fading soon as interest income declines with lower policy rates, while higher impairment costs start weighing on profits with a usual lag.
  - Almost 90 percent of the increase in net interest margins recorded in 2023 is projected to fade on relatively high short-term sovereign yields and a gradually steepening yield curve, with only a small residual amount persisting over 2024-26.
- Structural factors that have weighed on European bank performance—such as low operational cost efficiency and limited adoption of digital technologies over the past two decades—have largely remained unaddressed and will continue to drag on profits and capital once the net interest margin boom dissipates.
- New one-off taxes or other measures on bank profits are set to reduce banks’ ability to extend credit or absorb shocks on capital; the need to preserve or rebuild buffers varies significantly across countries and individual banks.

### Drivers of the 2023 profit surge
- Cyclical/macroeconomic drivers:
  - Higher policy rates and a steeper yield curve increased net interest margins, especially when interest rates exited negative territory after eight years up until mid-2022.
  - Deposit rates were relatively sluggish compared to loan rates, amplifying margins through banks’ maturity transformation.
- Bank-specific drivers:
  - Resilient asset quality in 2023 limited impairment costs, supporting reported profits.
  - Persistent weaknesses remain: low cost efficiency and limited digital adoption are ongoing drags.
- Structural drivers:
  - Overcapacity in certain markets and limited competition in deposit markets contributed to the asymmetric pass-through of rate increases to deposit rates.
  - The literature highlights concentration, branch network intensity, and regulatory changes as structural influences on profitability.

### New and heterogeneous bank taxes introduced in the EU (summary)
- 12 out of 27 EU countries have introduced new taxes on banks since 2023.
- Significant heterogeneity in tax design: tax base, tax rate, duration, revenue, and optionality to replace taxes with capital-raising measures.
- Estimated impact on tax revenue ranges from 0.02 percent of risk-weighted assets (RWA) to 1 percent of RWA.
- Box Table 1 (summary figures):
  - Belgium — Tax base: Liabilities; Tax duration: Permanent; Tax revenue, EUR million: 1500; Tax revenue, percent of RWA: 0.04
  - The Netherlands — Tax base: Liabilities; Tax duration: Permanent; Tax revenue, EUR million: 1500; Tax revenue, percent of RWA: 0.02
  - Slovenia — Tax base: Assets; Tax duration: 5 years; Tax revenue, EUR million: 1110; Tax revenue, percent of RWA: 0.3
  - Estonia — Tax base: Profits; Tax duration: 2 years; Tax revenue, EUR million: 600; Tax revenue, percent of RWA: 0.3
  - Latvia — Tax base: Profits; Tax duration: 1 year; Tax revenue, EUR million: 140; Tax revenue, percent of RWA: 0.9
  - Lithuania — Tax base: NII *; Tax duration: 1 year and 7.5 months; Tax revenue, EUR million: 250; Tax revenue, percent of RWA: 1.2
  - Czech Republic — Tax base: Profits *; Tax duration: 3 years; Tax revenue, EUR million: 6000; Tax revenue, percent of RWA: 0.5
  - Romania — Tax base: Net Revenue; Tax duration: Permanent; Tax revenue, EUR million: 1600; Tax revenue, percent of RWA: 0.2
  - Slovakia — Tax base: Profits; Tax duration: 3 years (decreasing); Tax revenue, EUR million: 340; Tax revenue, percent of RWA: 0.8
  - Hungary — Tax base: Net Revenue; Tax duration: 2-3 years; Tax revenue, EUR million: 640; Tax revenue, percent of RWA: 0.6
  - Spain — Tax base: Net Revenue *; Tax duration: 3 years; Tax revenue, EUR million: 12000; Tax revenue, percent of RWA: 0.1
  - Italy — Tax base: NII *; Tax duration: 1 year; Tax revenue, EUR million: 30000; Tax revenue, percent of RWA: 0.25
  - Notes: * = "excess"; ** = option to allocate to capital

### Projections and scenario analysis
- Scenario analysis indicates that almost 90 percent of the increase in net interest margins recorded in 2023 is projected to fade under assumptions of relatively high short-term sovereign yields and a gradually steepening yield curve.
- Only a small residual amount of the 2023 margin increase is projected to persist over 2024-26.
- Profitability gains in 2023 are characterized as largely cyclical—mainly a side effect of the rapid rise in monetary policy interest rates from negative levels and limited competition among banks for deposits during a period of high bank liquidity.
- As central banks lower policy rates, net interest margins are expected to decline because deposit rates, which lagged loan rates in the tightening cycle, will fall by a smaller extent; simultaneously, impairment costs may rise with a lag as credit risk materializes.

### Data, methodology, and scope
- Dataset: balance sheets and income statements for over 2,500 European banks (data sourced from Fitch Connect; generally quarterly frequency but analysis relies on annual frequency).
- Coverage: most banks disclose annual statements; fewer report semi-annual (typically end-Q2 and year-end), even fewer quarterly statements.
- 2023 data: full 2023 annual data unavailable at time of writing; recent developments assessed using 2023 Q3 data, skewing analysis toward large banks.
- Empirical strategy: differentiates cyclical/macroeconomic factors, bank-specific factors, and structural variables to identify drivers of profitability.

---

### Box 2. Steps to Clean Fitch Connect Data

### Data cleaning steps
- 1. Confined market sectors in Fitch Connect to: 'Banks', 'Credit Union', 'Other Banks', 'Retail & Consumer Banks', 'Universal Commercial Banks', 'Trading & Investment Banks', 'Wholesale Commercial Banks', 'Development Banks'. Excluded other institutions, e.g., central banks.
- 2. Excluded inflation-adjusted balance sheets.
- 3. Included only annual balance sheets and income statements, except for 2023 where Q3 data are featured. Fiscal year rule: if fiscal year ends in second half of calendar year, year of balance sheet = fiscal year; if fiscal year ends in first half, year of balance sheet = fiscal year minus one.
- 4. When multiple balance sheets exist for one year, kept consolidated balance sheets when available; otherwise used unconsolidated. This step drops around 15 percent of observations.
- 5. Dropped balance sheets with statement types ‘Estimated’, ‘Forecast’, ‘Preliminary’, ‘Partial’ or ‘Pro-forma’ when annual.
- 6. If multiple accounting practices: selected IFRS if available, or Local GAAP otherwise. If neither, kept the accounting system most frequently used by the same bank. As of 2022, around 40 percent of banks use IFRS; the rest mainly use Local GAAP.
  - For the Section “Drivers of bank profitability”, only unconsolidated data are used so that the impact of sovereign yields in one country is confined to institutions operating in that country.
- 7. When multiple fiscal year end dates within a year, kept balance sheets with the latest fiscal year end-dates within the year.
- 8. When multiple ‘Audited/Qualified Flag’ within a year, kept the highest level (‘Unqualified opinion’).
- 9. When multiple ‘Fitch Nickname’ values exist, picked the ‘Fitch Nickname’ most frequently used in the latest observation of a bank; in years with multiple balance sheets kept the reserved ‘Fitch Nickname’ if available.
- 10. When multiple balance sheets but no reserved ‘Fitch Nickname’, kept the ‘Fitch Nicknames’ most frequently used among those available in that year.

### Post-cleaning dataset outcome
- Ensured only one balance sheet at the firm-year level.
- Summary statistics of key financial ratios of the annual and Q3 datasets are presented in Annex Table A1 and A2.

---

### Short-term interest rates, net interest margins, impairments, and ROA (Annex Table A3 highlights)

### Key empirical results
- Coefficients of the 2-year sovereign yield term on ROA are described as "slightly negative and statistically insignificant."
- A one pp increase in 2-year sovereign yields:
  - Raises the ratio of net interest margins to total assets by around 9 basis points (Table 2, Panel A, columns 4 and 8).
  - Raises the ratio of impairment cost to total assets by 7 basis points (Table 2, Panel A, columns 4 and 8).
- Under a two-year lag structure, parameter estimates show similar patterns, with the net impact of short-term interest rates on bank profits close to zero.
- Historical experience: during 2000-20, short-term yields peaked in 2000-01 and 2007-08; impairment cost ratio peaked two years after the peak in short-term yields (at a much higher level following the GFC).

### Recent exceptional profits and expected path
- Exceptional profits in 2022 and 2023 driven by higher net interest margins and resilient asset quality, especially among larger banks.
- Figures and model results indicate:
  - Even under market expectations of monetary policy easing in 2024, banks’ impairment costs will likely continue to increase, offsetting gains from net interest margins.
  - Banks’ expected ROA is stable, supporting the view that the recent surge in profits is likely temporary.
  - Model-implied one-year ahead expected and realized ROA:
    - Expected ROA conditional on bank-specific and structural variables: stable and gradually increasing since 2013, but well below pre-GFC levels.
    - Expected ROA conditional on the whole set of dependent variables (including cyclical drivers): more volatile and largely exceeding the bank-specific/structural line in 2021 and 2022.
    - The gap captures additional information from cyclical variables; the 2023 surge is characterized as likely temporary.
- Historical lag: around two years between the peak in interest rates and the peak in impairment costs.

### Scenario and baseline outlook
- Baseline scenario (soft-landing): inflation declines to target and growth gradually strengthens to potential; interest rates ease moderately.
  - Bank net interest margins expected to decrease in the near term.
  - Asset quality expected to deteriorate.
- Credit risk indicator: implied probability of default of European publicly traded firms is currently increasing, supporting the view of more compressed bank profits ahead.

### Policy implications and recommendations
- Taxation of bank profits:
  - Advise caution in taxing bank profits. While taxes could raise fiscal revenue, rising credit risk suggests profits could be better used to build or preserve capital buffers.
  - The need to build buffers differs significantly across countries and individual banks.
  - Hasty ad hoc taxes on banks’ excess profits could dampen investor confidence, raise the cost of equity financing, and potentially inhibit banks’ ability to finance the recovery from the current cyclical downturn.
- Structural reforms and business-model improvements:
  - Structural factors that eroded European bank profitability remain largely unaddressed.
  - Scope to strengthen bank business models through:
    - Increased diversification in target markets and funding sources.
    - Improved cost efficiency.
    - Broader adoption of digital technology.
  - Further progress toward a banking union within the EU could help bring about significant efficiency gains.
- Overall implication:
  - Recent strong profits are likely temporary; prudence suggests prioritizing capital buffers and structural reforms over ad hoc fiscal measures targeting profits.

### Annex data highlights (selected medians from Table A2, Q3 balance sheets’ medians across banks)
- DEU: Total assets 14.83; Equity to total asset 4.64; ROA 0.15; ROE 4.37; Impairment cost  -0.36.
- FRA: Total assets 7.64; Equity to total asset 1.20; ROA 0.14; ROE 11.53; Impairment cost 0.00.
- ESP: Total assets 1.59; Equity to total asset 8.40; ROA 0.51; ROE 5.56; Impairment cost 0.15.
- POL: Total assets 50.53; Equity to total asset 9.62; ROA 1.02; ROE 10.49; Impairment cost 0.17.
- Table A3 contains regression results of profit and components against lagged variables (Panel A: 1-year Lags; Panel B: 2-year Lags).

*Source: IMF staff — Executive Summary, “Bank Profitability in Europe.”*

### Executive Summary ......................................................................................................

### Executive Summary

### Key findings
- Rapid hikes in monetary policy rates transmitted more slowly to banks deposit rates than to loan rates, leading to a sharp pickup in European bank net interest margins in 2023.
- Combined with resilient asset quality, wider net interest margins supported record profits for European banks, helping them recover back to levels last seen in the years preceding the Global Financial Crisis.
- Several policy initiatives were introduced in response to the boom in bank profits, including windfall taxes on excess profits or other taxes on banks, lower remuneration on minimum reserves, and initiatives encouraging higher, taxable dividend payouts.
- Drawing on historical data from the balance sheets and income statements of over 2,500 European banks, the paper projects that:
  - Abnormally high profits will start fading soon as interest income declines with lower policy rates, while higher impairment costs start weighing on profits with a usual lag.
  - Almost 90 percent of the increase in net interest margins recorded in 2023 is projected to fade on relatively high short-term sovereign yields and a gradually steepening yield curve, with only a small residual amount persisting over 2024-26.
- Structural factors that have weighed on European bank performance—such as low operational cost efficiency and limited adoption of digital technologies over the past two decades—have largely remained unaddressed and will continue to drag on profits and capital once the net interest margin boom dissipates.
- New one-off taxes or other measures on bank profits are set to reduce banks’ ability to extend credit or absorb shocks on capital; the need to preserve or rebuild buffers varies significantly across countries and individual banks.

### Drivers of the 2023 profit surge
- Cyclical/macroeconomic drivers:
  - Higher policy rates and a steeper yield curve increased net interest margins, especially when interest rates exited negative territory after eight years up until mid-2022.
  - Deposit rates were relatively sluggish compared to loan rates, amplifying margins through banks’ maturity transformation.
- Bank-specific drivers:
  - Resilient asset quality in 2023 limited impairment costs, supporting reported profits.
  - Persistent weaknesses remain: low cost efficiency and limited digital adoption are ongoing drags.
- Structural drivers:
  - Overcapacity in certain markets and limited competition in deposit markets contributed to the asymmetric pass-through of rate increases to deposit rates.
  - The literature highlights concentration, branch network intensity, and regulatory changes as structural influences on profitability.

### New and heterogeneous bank taxes introduced in the EU (summary)
- Almost half of EU countries (12 out of 27) have introduced new taxes on banks since 2023.
- There is significant heterogeneity in tax design (tax base, tax rate, duration, revenue, and optionality to replace taxes with capital-raising measures).
- Estimated impact on tax revenue ranges from 0.02 percent of risk-weighted assets (RWA) to 1 percent of RWA.
- Box Table 1 (summary figures):
  - Belgium — Tax base: Liabilities; Tax duration: Permanent; Tax revenue, EUR million: 1500; Tax revenue, percent of RWA: 0.04
  - The Netherlands — Tax base: Liabilities; Tax duration: Permanent; Tax revenue, EUR million: 1500; Tax revenue, percent of RWA: 0.02
  - Slovenia — Tax base: Assets; Tax duration: 5 years; Tax revenue, EUR million: 1110; Tax revenue, percent of RWA: 0.3
  - Estonia — Tax base: Profits; Tax duration: 2 years; Tax revenue, EUR million: 600; Tax revenue, percent of RWA: 0.3
  - Latvia — Tax base: Profits; Tax duration: 1 year; Tax revenue, EUR million: 140; Tax revenue, percent of RWA: 0.9
  - Lithuania — Tax base: NII *; Tax duration: 1 year and 7.5 months; Tax revenue, EUR million: 250; Tax revenue, percent of RWA: 1.2
  - Czech Republic — Tax base: Profits *; Tax duration: 3 years; Tax revenue, EUR million: 6000; Tax revenue, percent of RWA: 0.5
  - Romania — Tax base: Net Revenue; Tax duration: Permanent; Tax revenue, EUR million: 1600; Tax revenue, percent of RWA: 0.2
  - Slovakia — Tax base: Profits; Tax duration: 3 years (decreasing); Tax revenue, EUR million: 340; Tax revenue, percent of RWA: 0.8
  - Hungary — Tax base: Net Revenue; Tax duration: 2-3 years; Tax revenue, EUR million: 640; Tax revenue, percent of RWA: 0.6
  - Spain — Tax base: Net Revenue *; Tax duration: 3 years; Tax revenue, EUR million: 12000; Tax revenue, percent of RWA: 0.1
  - Italy — Tax base: NII *; Tax duration: 1 year; Tax revenue, EUR million: 30000; Tax revenue, percent of RWA: 0.25
  - Notes: * = "excess"; ** = option to allocate to capital

### Projections and scenario analysis
- Scenario analysis indicates that almost 90 percent of the increase in net interest margins recorded in 2023 is projected to fade under assumptions of relatively high short-term sovereign yields and a gradually steepening yield curve.
- Only a small residual amount of the 2023 margin increase is projected to persist over 2024-26.
- Profitability gains in 2023 are characterized as largely cyclical—mainly a side effect of the rapid rise in monetary policy interest rates from negative levels and limited competition among banks for deposits during a period of high bank liquidity.
- As central banks lower policy rates, net interest margins are expected to decline because deposit rates, which lagged loan rates in the tightening cycle, will fall by a smaller extent; simultaneously, impairment costs may rise with a lag as credit risk materializes.

### Data, methodology, and scope
- New dataset compiled for this analysis encompasses balance sheets and income statements for over 2,500 European banks (data sourced from Fitch Connect and generally collected at quarterly frequency but the paper relies on annual frequency to maximize sample coverage).
- Data coverage differs across institutions; most banks disclose annual statements, fewer report semi-annual (typically end-Q2 and year-end), and even fewer quarterly statements.
- Given unavailability of full 2023 annual data at the time of writing, recent developments are assessed using 2023 Q3 data, skewing the analysis toward large banks.
- Empirical strategy differentiates cyclical/macroeconomic factors, bank-specific factors, and structural variables to identify drivers of profitability.

### Policy implications and recommendations
- Any policy response to the surge in bank profitability must consider that the profits are likely temporary and largely cyclical.
- Policymakers should encourage banks to build resilience to future shocks:
  - Channel temporary profits prudently—given the risk of higher-than-expected non-performing loans going forward, in many cases these funds could be more appropriately used to bolster bank capital.
  - Preserve or rebuild buffers as needed, noting significant heterogeneity across countries and individual banks.
  - Address structural factors that erode profitability, including improving cost efficiency and rationalizing branch networks where overly extended.
  - Further progress toward a banking union within the EU could help bring about significant efficiency gains.

*Source: IMF staff — Executive Summary, “Bank Profitability in Europe.”*

### Box 2. Steps to Clean Fitch Connect Data

### Box 2. Steps to Clean Fitch Connect Data

### Data cleaning steps
- 1. We confined the market sectors of firms in Fitch Connect to banks while excluding other institutions, e.g., central banks. More specifically, we only included the following market sectors: 'Banks', 'Credit Union', 'Other Banks', 'Retail & Consumer Banks', 'Universal Commercial Banks', 'Trading & Investment Banks', 'Wholesale Commercial Banks', 'Development Banks'.
- 2. We excluded inflation-adjusted balance sheets.
- 3. We only included annual balance sheets and income statements, except for the year 2023 for which we featured Q3 data. For most banks, the fiscal year ends in December. Therefore, we identified the year of each balance sheet according to the following rule: if the fiscal year ends in the second half of the calendar year, the year of the balance sheet in question is the same as the fiscal year; conversely, if the fiscal year ends in the first half of the calendar year, the year of a balance sheet is the fiscal year minus one.
- 4. When multiple balance sheets exist for one year, we only kept consolidated balance sheets when available. Otherwise, we used unconsolidated balance sheets. This step drops around 15 percent of the observations.
- 5. We dropped balance sheets with statement types of ‘Estimated’, ‘Forecast’, ‘Preliminary’, ‘Partial’ or ‘Pro-forma’ when the balance sheets are annual.
- 6. Some banks release multiple balance sheets each year following different accounting practices. In these cases, we selected IFRS, if available, or Local GAAP otherwise. For some banks, there are multiple balance sheets each year which are neither IFRS nor Local GAAP. In such cases, we only kept the balance sheet with the accounting system that is most frequently used by the same bank. As of 2022, around 40 percent of banks use IFRS. The rest mainly use Local GAAP.
  - When analyzing the drivers of profits in the Section “Drivers of bank profitability”, we only use unconsolidated data so that the impact of sovereign yields in one country is confined to institutions that operate in that country.
- 7. Some banks release multiple balance sheets with different fiscal year end dates within a year (the definition of the year of a balance sheet is defined in step 3). In those cases, we only kept the balance sheets which have the latest fiscal year end-dates within the year.
- 8. Some banks release multiple balance sheets with different ‘Audited/Qualified Flag’ within a year. We kept the balance sheets with the highest level ‘Audited/Qualified Flag’ within the year (the highest level corresponds to ‘Unqualified opinion’).
- 9. For some bank-year level observations, there are multiple balance sheets with different ‘Fitch Nickname’, which uniquely identify a bank’s statements with the same type of disclosure, including accounting system, consolidation, inflation adjusted currency, consolidation level etc. We picked the ‘Fitch Nickname’ that is most frequently used among the ‘Fitch Nicknames’ available in the latest observation of a bank. In years with multiple balance sheets for a bank, we only kept the reserved ‘Fitch Nickname’ if available.
- 10. For some bank-year level observations, there are multiple balance sheets but no balance sheets with the reserved ‘Fitch Nickname’. In those cases, we only kept the ‘Fitch Nicknames’ that are most frequently used among all ‘Fitch Nicknames’ available in that year.

### Post-cleaning dataset outcome
- After implementing all steps above, we ensured that there was only one balance sheet on the firm-year level.
- The summary statistics of key financial ratios of the annual and Q3 datasets are presented in Annex Table A1 and A2.

*Source: Box 2. Steps to Clean Fitch Connect Data (wpiea2024142-print-pdf).*

### Annex Table A3 shows results that also include the number of branches and the number of employees per total assets as

### wpiea2024142-print-pdf - Annex Table A3 shows results that also include the number of branches and the number of employees per total assets as

### Short-term interest rates, net interest margins, impairments, and ROA
- Coefficients of the 2-year sovereign yield term on ROA are described as "slightly negative and statistically insignificant."
- A one pp increase in 2-year sovereign yields:
  - Raises the ratio of net interest margins to total assets by around 9 basis points (Table 2, Panel A, columns 4 and 8).
  - Raises the ratio of impairment cost to total assets by 7 basis points (Table 2, Panel A, columns 4 and 8).
- Under a two-year lag structure, parameter estimates show similar patterns, with the net impact of short-term interest rates on bank profits close to zero.
- Historical experience: during 2000-20, short-term yields peaked in 2000-01 and 2007-08; impairment cost ratio peaked two years after the peak in short-term yields (at a much higher level following the GFC).

### Recent exceptional profits and their drivers
- The exceptional bank profits recorded in 2022 and 2023 were driven by:
  - Higher net interest margins as policy rates increased sharply from the lower bound.
  - Resilient asset quality which so far has withstood the test of high interest rates, especially among larger banks.
- The text emphasizes that exceptional profits in 2022‒23 are not only driven by net interest margins but also by resilient asset quality.

### Expected path of impairments and ROA
- Figure 18 (asset-weighted average of banks’ ratio of impairment cost to total assets and the historical cross-country median of 2-year sovereign yields) suggests:
  - Even under current market expectation of monetary policy easing in 2024, banks’ impairment costs will likely continue to increase, offsetting gains from net interest margins.
- Model results:
  - Banks’ expected ROA is stable, lending support to the notion that the recent surge in profits is likely temporary.
  - Figure 19 plots model-implied one-year ahead expected and realized ROA:
    - Blue dotted line: expected ROA conditional on bank-specific and structural variables — shows a stable and gradually increasing trend since 2013, but well below pre-GFC levels.
    - Green dashed line: expected ROA conditional on the whole set of dependent variables (including cyclical drivers) — more volatile and largely exceeding the blue line in 2021 and 2022.
    - The gap between the two expected-ROA lines captures additional information from cyclical variables; the 2023 surge is characterized as likely temporary.
- Historical trends indicate a lag of around two years between the peak in interest rates and the peak in impairment costs.

### Scenario and baseline outlook
- Baseline scenario (soft-landing): further decline in inflation to target and a gradual strengthening of growth to potential, where interest rates ease moderately:
  - Bank net interest margins are expected to decrease in the near term.
  - Asset quality is expected to deteriorate.
- Credit risk indicator:
  - Credit risk, measured by the implied probability of default of European publicly traded firms, is currently increasing, supporting the case for more compressed bank profits going forward.

### Policy implications and recommendations
- Taxation of bank profits:
  - Caution is advised in taxing bank profits. While taxing bank profits could raise fiscal revenue, expectations of rising credit risk suggest profits could be used to build or preserve capital buffers.
  - The need to build buffers differs significantly across countries and individual banks.
  - Hasty imposition of ad hoc taxes on banks’ excess profits could:
    - Dampen investor confidence.
    - Raise the cost of equity financing.
    - Potentially inhibit banks’ ability to finance the recovery from the current cyclical downturn.
- Structural reforms and business-model improvements:
  - Structural factors that eroded European bank profitability over the past two decades remain largely unaddressed.
  - There is significant scope to strengthen bank business models through:
    - Increased diversification in target markets and funding sources.
    - Improved cost efficiency.
    - Broader adoption of digital technology.
  - Further progress towards a banking union within the EU could help bring about significant efficiency gains.
- Overall implication:
  - Recent strong profits are likely temporary; prudence suggests prioritizing capital buffers and structural reforms over ad hoc fiscal measures targeting profits.

### Annex data highlights (selected)
- Table A1 and Table A2 provide country-level summary statistics and medians across banks for balance-sheet and profitability indicators (units: 1/ Billions of USD; 2/ Percentage).
- Example medians from Table A2 (Q3 balance sheets’ medians across banks, selected countries):
  - DEU: Total assets 14.83; Equity to total asset 4.64; ROA 0.15; ROE 4.37; Impairment cost  -0.36.
  - FRA: Total assets 7.64; Equity to total asset 1.20; ROA 0.14; ROE 11.53; Impairment cost 0.00.
  - ESP: Total assets 1.59; Equity to total asset 8.40; ROA 0.51; ROE 5.56; Impairment cost 0.15.
  - POL: Total assets 50.53; Equity to total asset 9.62; ROA 1.02; ROE 10.49; Impairment cost 0.17.
- Table A3 contains regression results of profit and components against lagged variables (Panel A: 1-year Lags; Panel B: 2-year Lags).

*IMF WORKING PAPERS — Bank Profitability in Europe — INTERNATIONAL MONETARY FUND*

### References

### References

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- Kirti, Divya, 2020. “Why Do Bank-Dependent Firms Bear Interest-Rate Risk?” Journal of Financial Intermediation, Elsevier, vol. 41, pages 1-14, January.
- Mirzaei, Ali, Tomoe Moore, and Guy Liu, 2013. "Does Market Structure Matter on Banks’ Profitability and Stability? Emerging vs. Advanced Economies," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2920-2937, August.
- Neves, Maria Elisabete Duarte, Maria Do Castelo Gouveia, and Catarina Alexandra Neves Proença, 2020. "European Bank’s Performance and Efficiency," JRFM, MDPI, vol. 13(4), pages 1-17, April.
- Pasiouras, Fotios and Kiriaki Kosmidou, 2007. "Factors Influencing the Profitability of Domestic and Foreign Commercial Banks in the European Union," Research in International Business and Finance, Elsevier, vol. 21(2), pages 222-237, June.
- Thibaut, Duprey and Lé Mathias, 2016. "Bankscope Dataset: Getting Started," SSRN Electronic Journal, November.

### Institutional reports, working papers, and technical notes
- Detragiache, Enrica, Thierry Tressel, and Rima Turk, 2018. "Where Have All the Profits Gone? European Bank Profitability Over the Financial Cycle," IMF Working Papers 2018/099, International Monetary Fund, May.
- European Banking Federation, 2018, “Navigating the Road Ahead—Market Trends and Strategic Options for European Banks,” November.
- European Central Bank, 2015. “Bank Profitability Challenges in Euro Area Banks: The Role of Cyclical and Structural Factors,” Financial Stability Review, ECB, May.
- European Central Bank, 2017. “Banks’ Profitability Prospects Modestly Improved, but Structural Headwinds Remain,” Financial Stability Review, ECB, May.
- European Central Bank, 2018. “How Can Euro Area Banks Reach Sustainable Profitability in the Future?”, Financial Stability Review, ECB, November.
- European Central Bank, 2019. “Euro Area Bank Profitability: Where Can consolidation Help?” Financial Stability Review, ECB, November.
- International Monetary Fund, 2022, “The Determinants of Bank Profitability,” Germany Financial Sector Assessment Program Technical Note, IMF, August.
- Maneely, Morgan and Lev Ratnovski, 2024. “Bank Profits and Bank Taxes in the EU,” IMF Working Papers (forthcoming), International Monetary Fund.
- Martín Fuentes, Natalia, Luca Di Vito, and João Matos Leite, 2023. "Understanding the Profitability Gap between Euro Area and US Global Systemically Important Banks," Occasional Paper Series 327, European Central Bank, August.

### Datasets and methodologies
- Thibaut, Duprey and Lé Mathias, 2016. "Bankscope Dataset: Getting Started," SSRN Electronic Journal, November.

*Bank Profitability in Europe: Not Here to Stay — Working Paper No. WP/2024/142*

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_Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024142-print-pdf.pdf_