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European banks are poised for a financial rebound, with net interest income expected to climb by roughly €30 billion over the next two years, analysts say, as loan growth and strategic hedging offset the drag from lower interest rates.
After a flat 2025, when central bank rate cuts stalled profits, UBS forecasts that net interest income, the difference between what banks earn from loans and what they pay depositors, will rise 3% in 2026 and 4.5% in 2027, bringing total annual earnings from €371 billion to €399 billion.
“Two-thirds of Europe’s net interest income comes from markets that are slow to benefit from higher rates, such as France, Germany, and the Netherlands,” said Jason Napier, head of European banking research at UBS. “Even when rates fall, these markets continue to grow, creating a delayed but steady boost.”
French banks, in particular, have been lagging. Many mortgages in France are fixed-rate, and deposits are tied to an old government-linked account system dating back to post-Napoleonic financial reforms, which forces banks to pay higher interest. Meanwhile, countries like Spain, Ireland, and Portugal, where banks react quickly to rate changes, saw margins bottom out in mid-2025 and are expected to rebound as lending activity picks up.
Deutsche Bank analysts said stabilizing margins combined with stronger loan growth will make interest income “a key driver of revenue growth” in 2026. Last year, fee and commission income led the growth in profits, while banks also used structural hedging to manage the swings in rates. Morgan Stanley noted that with the Eurozone’s rate-cutting cycle ending, net interest income has likely already bottomed out, with acceleration expected ahead as the yield curve steepens.
UBS also projects that European bank loans will grow by 4% annually over the next two years, up from 3% in 2025, while loan-loss provisions remain stable at €54–56 billion.
The surge in long-term interest rates has already fueled a rally in European bank shares, a trend analysts expect to continue through 2026 as net interest income recovers and lending activity strengthens.
