European banks’ returns on equity (ROE) face a five-year slump, with UK banks still well below their pre-Covid-19 profitability in 2025, according to new research from McKinsey.
ROE will remain as low as about 7% in the UK and 5% in the European Union, according to the consultancy.
Across Europe, banks could see their common equity tier-1 (CET1) ratios fall as low as 8%. That compares with CET1 ratios going into the crisis of around 12% or 13%. Today, BBVA suffers the lowest CET1 ratio of European banks, according to Berenberg, with 10.8%.
McKinsey’s report, which is based on its own economic modelling as well as a survey of more than 2,000 senior executives in banking and other industries, takes an unusually long and bearish view on the sector. It is based on a eurozone drop in GDP of 11% in 2020, with a recovery in late 2023. It takes into account government stimulus, but not the possible reaction from banks’ management.
Healthy banks are a critical pillar for a well-functioning economy, so banks and regulators must jointly find the way to recovery - Ildiko Ring, McKinsey
According to the report, a looming hit of 40% or more on banks’ revenues after cost of risk – with no recovery before 2024 – is a scenario “more severe for banking economics than the 2007-8 financial crisis or the 2010 European debt crisis”.
