EU banks remain resilient despite rising geopolitical uncertainty

Cyprus banking sector mirrors EU strength despite pressures

The European Banking Authority (EBA) has said that the EU and EEA banking sector remains resilient, even as geopolitical uncertainty intensifies following renewed conflict in the Middle East.

The findings were published in the authority’s risk dashboard for the fourth quarter of 2025, which for the first time was presented alongside the new CRR3 and CRD6 regulatory dashboard, replacing the previous Basel III monitoring report.

The EBA confirmed that European banks are entering this period of uncertainty from a position of strong capitalisation, ample liquidity and solid asset quality.

At the same time, the authority highlighted that direct exposures to the Middle East totalled €132 billion at the end of 2025.

These exposures included around €47bn in loans and advances to financial institutions and approximately €33bn to non-financial corporations.

Despite this, the EBA stressed that such exposures remain limited at less than 0.5 per cent of total banking assets, reducing immediate systemic risk.

However, it warned that escalating tensions could trigger second-round economic effects, including higher energy prices, inflationary pressures, weaker global growth and supply chain disruptions.

These risks are expected to affect energy-intensive sectors such as transport, construction and manufacturing in particular.

The report showed that risk-weighted assets rose by just over 1 per cent, reaching €10.2 trillion in the fourth quarter of 2025.

Meanwhile, the common equity tier 1 ratio stood at 16.3 per cent, maintaining a stable and robust capital buffer across the sector.

Profitability remained strong, with return on equity at 10.4 per cent, broadly unchanged from the previous year.

The net interest margin edged up to 1.6 per cent, suggesting that the downward trend observed earlier in 2025 may have stabilised.

At the same time, the cost-to-income ratio reached its highest level since March 2023, reflecting rising operational costs and seasonal factors.

Total banking sector assets remained stable at €29.1 trillion, while outstanding loans increased by more than 1 per cent.

This growth was primarily driven by lending linked to residential real estate and financing for small and medium-sized enterprises.

Asset quality also showed resilience, with non-performing loans declining to €370bn, keeping the NPL ratio steady at 1.8 per cent.

In addition, the share of Stage 2 loans fell to 9.1 per cent, indicating improving credit quality ahead of potential geopolitical shocks.

Liquidity conditions strengthened further, with the liquidity coverage ratio rising to 163.1 per cent.

More than 80 per cent of banks now maintain liquidity levels above 140 per cent, underscoring strong buffers across the system.

The net stable funding ratio increased to 126.9 per cent, while the loans-to-deposit ratio declined to 104.8 per cent.

Banks also recorded increased deposits, with household deposits rising by 1.8 per cent and deposits from non-financial corporations increasing by 3.6 per cent during the final quarter of 2025.

The newly introduced regulatory dashboard showed that under full implementation of CRR3 rules, the average CET1 ratio is projected to decline slightly to 15.3 per cent, while remaining robust.

This reflects a projected 4.7 per cent increase in minimum Tier 1 capital requirements as the output floor is phased in.

The number of institutions affected by the output floor is expected to rise from two at the end of 2025 to 33 under full implementation.

Despite these changes, the EBA indicated that no capital shortfalls are expected before 2030, with only modest gaps projected thereafter.

In this context, Cyprus’ banking sector reflects similar resilience, although with some emerging pressures.

According to the Central Bank of Cyprus (CBC), profitability in the domestic banking sector fell by 13.9 per cent in 2025, declining to €1.02bn.

This drop was mainly attributed to a reduction in net interest income across Cypriot banks.

At the same time, the sector recorded growth, with total assets rising by 6.6 per cent to €69.96bn in December 2025.

Capital strength in Cyprus remains particularly robust, with the CET1 ratio reaching 25.8 per cent, significantly above European averages.

In a recent statement, meanwhile, CBC governor Christodoulos Patsalides emphasised the country’s resilience amid external challenges.

“The country is navigating challenges from a position of strength,” he said.

He pointed to sound economic fundamentals, a solid fiscal base and a resilient banking system as key pillars supporting stability.

“The banking system remains well-capitalised and highly liquid,” he added.

Patsalides also stressed that these conditions enhance the sector’s ability to absorb potential external shocks linked to global uncertainty.

At the same time, authorities are closely monitoring developments such as rising energy prices, which could feed into inflationary pressures across the eurozone.

The EBA report underscores that while European banks remain well positioned, the evolving geopolitical landscape introduces new risks that could test the sector’s resilience.

For Cyprus, the combination of strong capital buffers and improving asset quality provides a solid foundation, although profitability pressures and external shocks remain key challenges going forward.