Higher Tariffs may affect EU Banks' CoR
Morningstar DBRS warns European Banks’ Cost of Risk may increase
As global trade tensions resurface, European banks may no longer be able to count on the ultra-low cost of risk (COR) that characterized the post-pandemic recovery. In its April 2025 commentary, Higher Tariffs Could Increase European Banks' Low Cost of Risk, Morningstar DBRS warns that mounting tariff uncertainty—especially involving U.S. trade policy—could pressure banks to increase provisioning and reassess exposure to vulnerable sectors.
Despite maintaining a historically low average COR of 31 basis points in fiscal 2024—down from 39 bps in 2023 and far below the 107 bps spike seen in 2020—Morningstar DBRS expects banks will need to prepare for a bumpier ride in 2025.
“The increasingly uncertain macro environment, particularly in relation to U.S. tariffs, will likely translate into higher COR and Stage 2 loan levels in F2025,”
the agency said.
Sectoral Stress and Conservative Shifts
While the immediate tariff impact has been concentrated in the automotive, aluminum, and steel sectors, Morningstar DBRS anticipates banks will proactively hedge their exposure to adjacent industries. This includes chemicals, industrials, consumer goods, and healthcare.
“We expect European banks to take a conservative approach… posting higher provisioning levels and increasing Stage 2 loans,”
the report noted.
That cautious stance echoes the behavior seen during the pandemic, when banks moved early to fortify their balance sheets against downside scenarios. A similar risk-averse strategy is now expected, even though COR and Stage 2 loan levels are still projected to stay well below pandemic-era highs.
Country-by-Country Performance
While most banks showed improvement or stability in COR, there were notable outliers. German banks, in particular, are flashing early warning signs. The average COR for German banks rose from 38 bps in 2023 to 42 bps in 2024. For context, Germany’s pre-pandemic COR in 2019 was just 16 bps.
“Existing challenges in the German auto sector, the still-weak economic outlook, and uncertainty surrounding U.S. tariffs will likely translate into higher COR for German banks in F2025,” Morningstar DBRS warned.
In contrast, banks in Denmark, Sweden, and Finland posted some of the lowest COR figures in 2024, reinforcing their reputations for conservative underwriting and relatively resilient economies.
Interest Rate Outlook Adds to Uncertainty
Although European central banks are signaling forthcoming rate cuts, interest rates remain elevated compared to the ultra-low levels of recent years. Morningstar DBRS sees this rate environment as a potential trigger for rising nonperforming loans and higher provisions—especially if economic conditions in Europe soften further or unemployment rises.
Still, the report maintains a cautiously optimistic baseline.
“We do not project that European banks will see a dramatic shift in either COR or Stage 2 loan levels this year… although they are likely to increase from F2024 levels.”
One stabilizing factor is the presence of “management overlays”—buffer provisions held since the pandemic—that many banks can draw on to smooth the transition through a more volatile environment.
Final Thoughts
Morningstar DBRS is not sounding the alarm—yet. But the firm is clear: geopolitical unpredictability and tariff risk are rising, and European banks may soon find themselves tightening their credit stance. The cost of risk is creeping upward, and while still far from crisis levels, it’s a trend worth watching as the global trade chessboard shifts.
EU NPL Progress Made, Risks Remain
Europe’s banking sector has spent the last decade aggressively tackling its legacy of non-performing loans (NPLs)—and the numbers show it’s paying off. According to ARC Ratings, the NPL ratio in countries like Spain and Italy plummeted from crisis-era highs of 16.2% and 17% in 2014 to just 3.4% and 2.8% by 2024, respectively.
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Relevant Links:
https://dbrs.morningstar.com/research/451966/higher-tariffs-could-increase-european-banks-low-cost-of-risk
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