European Banks Poised for €30bn Interest Income Rebound Through To 2027
Loan growth and structural hedging strategies set to offset rate cut pressures as profitability driver rebounds from 2025 stagnation
European banks are in line for a €30 billion boost to interest income over the next two years, as loan growth and hedging techniques help offset the drag to profitability from lower interest rates. The projected rebound marks a significant turnaround following a year of flatlining net interest income in 2025 as central banks reduced rates from their recent peaks.
Growth in net interest income (NII)—a key driver of lenders’ profits—is widely expected to pick up in 2026 and 2027, according to analysts at UBS. The Swiss bank estimated that NII will climb 3% in 2026 and another 4.5% in 2027, increasing from €371 billion to €399 billion across the European banking sector during the two-year period. This represents a dramatic improvement from the mere €2 billion increase projected for 2025.
NII—the difference between the interest banks receive from borrowers and pay out to depositors—has been the main driver of profits for continental and UK lenders since central banks started lifting interest rates from historic lows in 2022. The income surge helped propel a broad-based rally in sector share prices, with the Stoxx 600 Banks Index surging nearly 60% in 2025 alone. Individual names including Commerzbank and Société Générale saw valuations more than double over the past year.
However, a combination of loan growth, structural hedging techniques and disparities in how quickly banks in different European countries benefit from higher rates should prompt an NII rebound despite the rate-cutting environment. Analysts forecast that loan growth across European lenders will rise approximately 4% annually over the next two years, with lending to non-financial corporations anticipated to maintain close to 4% yearly growth through 2027 while household loans are forecast to accelerate to 3.3% in 2026 and 3.7% in 2027.
“Roughly two-thirds of European net interest income is driven by markets which are slow to see the benefits of higher rates—like France, Germany and the Netherlands—and which continue to grow even as policy rates fall,” said Jason Napier, head of European banks research at UBS. This structural characteristic of certain European markets creates a lagged effect that supports profitability even during monetary easing cycles.
French banks are particularly slow to benefit from higher rates because their mortgage market is geared towards fixed-rate loans. Profitability at the country’s banks is also squeezed by the Livret A, a popular 200-year-old savings account originally designed to help restore France’s public finances after Napoleon Bonaparte’s wars. Rates on these accounts are linked to inflation and set by the government, forcing banks to pay more for deposits regardless of prevailing market conditions.
Structural hedging has emerged as a critical tool for European banks seeking to reduce the rate sensitivity of their balance sheets. These strategies include expanding bond portfolios, implementing interest rate swaps, and actively managing the repricing of liabilities ahead of assets. Crucially, structural hedges implemented during the higher rate environment are still rolling onto higher rates through 2026, meaning banks can continue to reprice their assets at beneficial levels even as headline rates stabilize or decline.
This dynamic acts as a significant tailwind for net interest income margins across both eurozone and UK coverage. European NII saw a year-over-year increase of 4% in Q1 2025, defying pressure from multiple interest rate cuts delivered by major central banks. Notably, no European bank downgraded its full-year NII guidance during earnings season, a decision that drew scrutiny from analysts but reflected confidence in the structural supports underpinning profitability.
The European Central Bank has held its deposit facility rate steady at 2% since July 2025, having previously cut rates from a peak of 4%. Markets widely expect rates to remain unchanged through 2026 and potentially into 2027, with inflation running at 2.2% as of November 2025—slightly above the ECB’s 2% target. This “higher for longer” scenario supports the optimistic NII outlook, as rates are not expected to drop much below 2% even if economic conditions soften.
The banking sector’s strong performance has been supported by diversified business models, with fee income expansion and successful cost reduction initiatives delivering tangible benefits alongside NII growth. Investment banking revenues remain volatile but generally supportive, particularly in fixed income and debt capital markets. Banks are also increasingly highlighting potential cost savings from artificial intelligence implementation, with consulting firm McKinsey estimating AI could bring the global banking industry as much as $340 billion annually in additional value.
However, risks remain. The ECB has warned that euro zone banks face “unprecedentedly high” risks from geopolitical tensions, shifting trade policies, and climate-related crises. Credit costs could rise if economic conditions deteriorate more sharply than expected, while increased competition for market share could pressure margins. Non-performing loans have edged higher for exposures to small and medium-sized enterprises and commercial real estate, reaching 4.6% and 4.4% respectively.
Despite these concerns, analyst sentiment remains constructive. Morgan Stanley projects NII growth accelerating to 4% in 2026 for European banks, driven by expanding margins and volume growth. The firm expects loan growth to double to 4-5% year-over-year at a euro area level, with the greatest acceleration in Spain, Ireland, and Germany among core countries.
After ending 2025 with record profitability and capital buffers at multi-year highs, European banks enter 2026 in a position of strength. The projected €30 billion NII rebound over two years would consolidate gains from the higher rate period while demonstrating the sector’s ability to navigate a changing monetary policy environment. For investors, the question now centres less on whether banks can maintain profitability than on how they deploy excess capital—through dividends, buybacks, or growth investments—as the rate tailwind moderates but loan growth accelerates.
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