The European banking industry has just rebounded from the coronavirus pandemic – in fact recording its best set of results since the financial crisis – but it already faces significant uncertainty again due to Russia’s war against Ukraine. In this sense, its position is no different than that of the real economy which had not even fully recovered from the external shock of the pandemic and is now confronted with the next one whose impact and duration is hard to foresee at the outset.

For firms and households, the repercussions are mainly felt via surging prices for energy, commodities and food as well as through further disruptions of already stretched supply chains. This will reduce growth. And of course, many firms active in Russia have shut down or at least suspended their operations in the country.

This is similar for European banks. They also feel the consequences in other areas: unprecedented sanctions have been imposed by Western countries on transactions with Russian firms and individuals. Financial markets are down from their highs (this is also due to the expectation of accelerated monetary tightening though) and volatility has risen. Following a likely initial spike in corporate lending because of increased liquidity holdings and higher input costs, lower economic growth and higher interest rates may also dampen banks’ lending business with companies and households. Most importantly, more private-sector customers will probably get into trouble and face difficulties repaying their debt, hence loan loss provisions are expected to climb.

Overall, banks’ operating environment has clouded substantially over the past two months, even though the impact of war may be less severe than that of the pandemic. However, a lot depends on the future path of the conflict. A further military escalation or a long, drawn-out repeat of the Cold War between the West and Russia (potentially even involving other parties such as China) could exacerbate the costs also for Europe’s banks.

Right now, they stand in impressively good shape. True, with Q1 reporting season just started, the figures for 2021 are only a look in the rearview mirror, yet they still show fundamental improvements and a re-won strength of the European banking sector that allows it to face this next challenge with some confidence. Net income in 2021 almost quadrupled from the depressed prior-year level, surging to the best result since the financial crisis, surpassing 2018 as the previous peak. This was primarily due to reduced provisions: loan loss provisions were the lowest since at least 2005 when this time series started, driven by net releases at a number of banks.

Higher revenues also contributed to the rebound in profitability: total revenues increased by 5%, thanks to booming fee and commission income (+12%) and a stabilisation in net interest income which, after a weak start to the year, made up for that in H2. Likewise, trading income was essentially flat yoy. Administrative expenses rose for the first time since 2015, by 3%, but less than revenues.

The yoy swings in the P&L were unusually large and in some ways the consequence of banks’ cautiousness in the first year of the pandemic which led to some “overshooting” in the second as the macroeconomic picture improved substantially and banks were able to partly reverse course. Thus, bottom line, post-tax earnings jumped by a staggering EUR 72 bn yoy, particularly driven by lower loss provisions (EUR -50 bn) and higher revenues (EUR +20 bn). Industry profits are still about a quarter lower than at the pre-financial crisis peak in 2006 though, in nominal terms, which shows the major changes and challenges the banking system has been going through over one-and-a-half decades.