Iran War Spillovers Could Weaken Robust 2026 Outlook for EU Banks - Fitch

Tue 31 Mar, 2026 - 12:55 PM ET

Fitch Ratings-Stockholm/Paris-31 March 2026: Large European banks enter the heightened uncertainty and volatility caused by the Iran war from a position of strength, Fitch Ratings says in its latest Large European Banks Quarterly Credit Monitor. However, the impact of an adverse scenario, in which the conflict continues until end-June, on economic growth prospects and inflation could result in downward revisions of Fitch’s forecasts for bank profitability and asset quality, but the banks’ ratings should be largely resilient.

Under its base case, in which economic growth is not materially affected, Fitch expects the banks’ profitability to stay strong in 2026, supported by business growth and revenue diversification. This follows robust 2025 results, when seven of the 20 banks reached 15-year-high operating profit/risk-weighted assets (RWAs) ratios. Under the base case, Fitch expects the median will remain near 3% in 2026 (2025: 3.1%).

Revenue strength should continue under the base case. The median net interest margin tightened slightly to about 1.5% in 2025, mainly on deposit margin compression. Fitch mostly expects mid-single-digit net interest income growth in 2026, with some regional differences. Margin pressure should moderate – and loan growth strengthen – for southern European banks, while French banks should benefit from repricing and lower funding costs. We expect structural hedge income to support UK banks’ margins.

Fitch expects broadly stable impaired loans in 2026 under its baseline scenario, with loan impairment charges around 30bp of gross loans, but this could worsen materially should the situation in Iran become protracted. The vast majority of the banks have low direct exposure to the Middle East, but they will be exposed to higher energy prices, lower equity prices and lower growth.

Capital buffers remain robust, with a median common equity Tier 1 ratio of 14.2% at end-2025. Fitch expects strong earnings to support capital despite high dividends and buybacks, alongside more dynamic capital management and greater use of significant risk transfers to optimise RWAs