One-and-a-half years after the onset of the coronavirus pandemic, the European banking sector has (mostly) exited crisis mode. Start with balance sheet trends: Lending to companies in the euro area had surged initially but has now returned to virtual stagnation, as the initial move is corrected. In many Southern countries such as Italy, Spain or Greece, where loan volumes had been declining at the start of 2020, they are currently doing so again.

Second, mortgage lending to households continues to show no crisis impact at all. The robust expansion is gradually gaining further momentum and, at +5.6% yoy, already the strongest since 2008. This comes despite (but also due to) house prices rising unabatedly in many European countries which may partly reflect the perceived shortage of attractively valued other assets, in light of zero or negative interest rates and bond and equity markets close to record highs. It probably also plays a role that months of working from home have triggered a greater demand for space and comfortable “own four walls”.

Third, even the P&L broadly resembles pre-crisis times, i.e. H1 2021 and H1 2019 results for the 20 leading European banks have a lot in common and underscore how last year’s performance was, essentially, an outlier. Revenues had contracted by 5% at the beginning of the pandemic, but have now rebounded 3%. Loan loss provisions had tripled, yet have since fallen back to where they were before, and indeed somewhat further, matching the record low of H1 2018 (for a time series which began in 2006).

Thanks to massive government and central bank support, the much-feared deterioration in asset quality did not materialise. In fact, despite the deep recession, NPL ratios have stayed fairly low (or even continued to decline) in most countries. They are now only 4.4% in both Italy and Spain, 2.7% in France and about 1% in Germany. Bottom line, the swings in provisions had the largest effect on banks’ net income. The latter had almost been wiped out last year, but reached EUR 54 bn in H1 2021, compared with EUR 48 bn two years before. By that measure, it was European banks’ best first half since the financial crisis.

Still, the crisis has left some scars on the banking system. For instance, overall stability in revenues hides underlying divergence. Thanks to buoyant capital markets, fees and commissions as well as trading income are both up substantially versus H1 2019, while net interest income has suffered quite a bit (-8%) because interest rates have remained under pressure, particularly in the retail business.

Second, capital and liquidity ratios are significantly higher than two years ago. The CET1 ratio rose 1.3 pp to 14.9% over this period, even as banks recently resumed dividend payments and corresponding provisions.

This leads to the third main difference: across the euro area, the relationship between banks and the central bank remains much tighter than before the pandemic. Banks have used the ECB’s targeted longer-term refinancing operations (TLTROs) to a large extent – currently, total ECB funding stands at EUR 2.3 tr, up from EUR 662 bn at end-2019 – because the central bank offers negative funding rates of up to -1%. This is welcome relief in times of interest margin compression and ever lower asset yields. Remarkably, the ECB is thereby competing ever more directly with ordinary private-sector deposits which have become financially less attractive for banks.