Banks ready to weather headwinds from trade, geopolitical conflict.

Despite an array of challenges to their profits and capital strength, the big European banks remain well-armed to face the headwinds posed by ongoing global trade disruptions and geopolitical conflicts, says Morningstar DBRS.

In a new report, the rating agency said the European banks have faced intensified capital pressures — including both new provisions of the Basel capital rules taking effect in early 2025 and higher shareholder payouts — yet their efforts to optimize balance sheets and enhance profitability have left them in still-strong capital positions amid rising economic and financial risks.

“European banks generally maintain ample capital cushions over regulatory requirements,” it said. “We see this as the first line of defence against the uncertainty heightened by current geopolitical tensions and the global trade war.”

The banks have bolstered their capital through a rise in net interest income that accompanied the higher interest rate environment, along with actions designed to boost capital ratios, such as optimizing risk-weighted assets and engaging in synthetic risk transfer transactions, the report noted.

“As a result, capital ratios have generally increased since 2020 and have remained resilient in 2025,” despite growing headwinds, DBRS said.

Amid stronger capital levels, the banks have increased dividends and stepped up share buybacks in the past year, boosting shareholder returns, it noted.

Looking ahead, DBRS said it expects dividends to decline in the next couple of years “as profitability contracts because of interest margin compression and potentially higher credit costs related to the geopolitical tensions and global trade war.”

Net interest income has already declined along with interest rates, but earnings have been supported by growing profits from trading, rate hedging strategies, loan growth and rising fee income, the report noted.

However, there are growing risks to earnings from macroeconomic headwinds. While the banks’ direct exposure to these kinds of risks “appears to be manageable,” the report said “the indirect implications stemming from a potential sluggish economic growth, increase in unemployment rates and slowdown in business activity could be more material.”

Alongside these challenges, some banks still need to absorb the full impact of growing regulatory demands under the latest Basel capital requirements, which will be felt over several years. Industry consolidation may further weigh on banks’ capital, it noted.