European banks improve asset quality YOY but bolster provisions amid Iran war

Most large European banks recorded improved asset quality in the first quarter compared to a year ago even as they increased loan loss provisions to brace for the impact of the Middle East war.

Of the region's 43 biggest banks, 31 reported year-over-year improvements in their problem loan ratios, with Italy's Banca Monte dei Paschi di Siena SpA and Finland-based OP Pohjola registering the biggest declines, of 177 basis points and 72 basis points respectively, according to S&P Global Market Intelligence data. Other banks with double-digit basis-point reductions included CaixaBank SA, Raiffeisen Bank International AG and Intesa Sanpaolo SpA.

Europe's big banks increased their loan loss provisions by nearly a third as higher energy prices fueled by the Gulf conflict drive economic uncertainty. Aggregate provisions among the region's biggest banks totaled €10.74 billion in the first quarter, up 7.4% from the prior quarter and up 31.9% from a year earlier, according to S&P Global Market Intelligence data.

European banks have limited direct exposure to the Middle East. According to the European Banking Authority, EU banks' direct exposures to Middle Eastern counterparties stood at €132 billion at 2025-end, equivalent to less than 0.5% of their total banking assets. That includes around €47 billion in loans and advances to financial companies and around €33 billion to nonfinancial corporations.

However, potential second-round effects — such as higher energy prices, inflationary pressures, weaker global economic growth and disruptions to supply chains — could result from a further escalation of the conflict, the EBA said.

Moreover, on a quarter-over-quarter basis, most banks' problem ratios worsened, including that of Monte dei Paschi which increased by 153 bps, reflecting the exposures of newly acquired peer Mediobanca Banca di Credito Finanziario SpA. UK bank Barclays PLC and Italian peer UniCredit SpA booked sharp quarterly increases of 39 bps and 38 bps, respectively, followed by France's Groupe BPCE with a 33-bps uptick.

Of the sampled banks, Hungary's OTP Bank Nyrt. had the highest problem loan ratio of 3.37%, followed by Poland-based PKO Bank Polski SA and Spain's Banco Santander SA with 3.31% and 3.27%, respectively. Türkiye Is Bankasi AS and Türkiye Vakiflar Bankasi Türk AO, French banks Groupe BPCE and Société Générale SA, and Germany's Deutsche Bank AG also had ratios exceeding 3%.

Barclays recorded the highest sequential rise in Stage 2 loans — those which are at significant risk of impairment under IFRS 9 accounting — of 124 bps, followed by Netherlands-based ING Groep NV and British peer NatWest Group PLC, each with increases of 117 bps.

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