The European Banking Authority (EBA) this week reported that the EU and EEA banking sector remained robust in the first quarter of 2025, despite higher costs of risk.

Publishing its quarterly Risk Dashboard, the EBA reported that the common equity tier 1 (CET1) ratio for EU and EEA banks stood at 16.2 per cent, unchanged from the previous quarter.

Risk-weighted assets totalled €9.9 trillion, with operational risk now accounting for 12.9 per cent of total risk-weighted assets.

Total assets for EU and EEA banks reached €29 trillion, an increase of 2.7 per cent over the quarter, largely driven by higher debt securities holdings, which rose to 14.6 per cent of total assets from 13.7 per cent in the fourth quarter of 2024.

Cash balances also edged higher to 10.9 per cent of assets, while loans to customers grew by close to 1 per cent, driven mainly by mortgage lending to households and corporate loans to small and medium-sized enterprises.

Non-performing loans (NPLs) totalled €377.8 billion, broadly unchanged from the previous quarter, while stage 2 loans fell as a proportion of total loans to 9.5 per cent.

The cost of risk increased to 57 basis points, well above the post-2021 average of around 48 basis points, and the highest level since 2021, although the EBA noted that first-quarter data typically showed seasonal spikes.

Return on equity (RoE) for EU and EEA banks came in at 10.5 per cent, down slightly from the same quarter in 2024, while return on assets was stable at 0.73 per cent.

The net interest margin (NIM) fell by 5 basis points to 1.6 per cent from the previous quarter and was down 8 basis points compared with March 2024.

Net interest income dropped by 1.3 per cent year-on-year, offset by asset growth and a 6 per cent rise in net fee and commission income.

The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) both eased, to 159.5 per cent and 126.9 per cent respectively, though still comfortably above minimum requirements.

In Cyprus, the Central Bank of Cyprus (CBC) said profitability in the banking sector fell sharply in the first quarter of 2025, dropping by €82 million to €264 million from €346 million in the same period of 2024.

“This decrease is mainly attributed to a reduction in net interest income,” the CBC said.

What is more, the total assets of Cypriot banks rose by €422m, or 0.6 per cent, to €66.02 bn in March 2025, up from €65.60 bn in December 2024.

The increase was driven by higher volumes of loans and advances, as well as debt securities.

The CET1 capital ratio in Cyprus improved from 24.7 per cent at the end of 2024 to 26.0 per cent in March 2025, largely due to a reduction in total risk exposure.

The NPL ratio in the Cypriot banking sector fell to 6.1 per cent in March 2025 from 6.2 per cent in December 2024, with the coverage ratio rising to 60.5 per cent from 59.9 per cent.

“The improvement was mainly due to repayments, positive migration of loans to performing status, write-offs, and foreign exchange movements,” the CBC said.

By the end of April 2025, the NPL ratio had dropped further to 5.9 per cent, with total NPLs amounting to €1.49 bn out of a total loan stock of €25.19 bn.

Of this, €1.15 bn were more than 90 days overdue, while 7.7 per cent of household loans and 5.1 per cent of corporate loans were classified as non-performing.

The NPL ratio for SMEs stood at 7.3 per cent, with the coverage ratio rising to 60.7 per cent.

Restructured loans totalled €1.3 bn in April 2025, of which €0.7 bn remained classified as non-performing.

Finance Minister Makis Keravnos recently reported that new schemes to resolve non-performing loans face two key hurdles, namely creditor cooperation and EU approval.

He warned that there are legal limits to what the government can do and cautioned against creating “unfair expectations”.

Keravnos added that Cyprus’ constitution strongly protects creditor rights through mortgage-backed ownership.

The CBC also reported that average interest rates on new loans to households are now almost aligned with the eurozone median, with the margin standing at 0.09 per cent for households and 0.44 per cent for non-financial corporations.

For new business loans, the gap compared with the eurozone median is just 0.24 per cent, although the CBC noted this figure is more volatile due to the smaller size of the Cypriot market.

In contrast, deposit interest rates in Cyprus for new deposits remain the lowest in the eurozone.

The CBC said this is partly due to the high liquidity of Cypriot banks, which in December 2024 had an LCR of 333 per cent compared with a eurozone median of 184 per cent.

CBC governor Christodoulos Patsalides said in June 2025 that the Cypriot economy is forecast to grow by 3.1 per cent in 2025, slightly down from the previous projection of 3.2 per cent.

“This resilience is largely due to the strong buffers built in recent years in critical areas such as public finances, the banking sector, and the supervisory framework,” he said.

He added that “the enhanced diversification of the production base, technological upgrades in key sectors, and the attraction of high value-added foreign investment give the economy the necessary momentum to respond effectively to an ever-changing and geopolitically fragile global environment”.

The governor has also mentioned that the banking sector has made “remarkable” progress, with the highest CET1 ratio in the EU, strong profitability in 2024, high liquidity buffers, and no signs of widespread deterioration in credit behaviour.

However, he stressed that banks must use profitability prudently to build long-term resilience and continue reducing NPLs, especially among smaller institutions.