European banks enter an operational excellence era as rate-driven profits fade
European banking is entering a period of normalization following the exceptional conditions of 2023 to 2025, according to Kearney’s latest European Retail Banking Radar, which tracks the performance of 88 banks across 21 markets in Western and Eastern Europe. Southern Europe stands out as the continent’s operational efficiency powerhouse.
Long-term success for European banks is not built on riding a boom; it is built on staying focused and getting things done even during a slump. That is one of the key takeaways from the report, which examined how regional banks are adapting to increasingly uncertain operating environments.
The numbers from last year show that banks largely managed to navigate the return to reality after easy interest rate-driven gains. Between 2022 and late 2023, banks raked in massive profits by immediately hiking loan rates while holding back on savings payouts, but that changed when central banks started cutting rates in mid-2024.
Moving into 2025 and beyond, long-term success will rely on disciplined management and tight operations rather than riding the high-interest wave. Indeed, the report found each 10 basis-point reductions in ECB (European Central Bank) policy rates translates to a decline in income across EU-27 banks worth €26 billion.
The results show banks in Southern Europe (Portugal and Spain, in particular) as leaders in efficiency, with Portugal boasting a cost-to-income ratio of 32%, and Spain with a ratio of 37%. That contrasts with France’s ratio of 67%, the highest in Europe. The total efficiency ratio for 2025 for Southern Europe on average was 44.9%, the lowest among European regions.
Drivers of profitability
Despite shrinking profit margins, retail loan volumes grew by 3.5% in 2025, marking the strongest expansion in three years as lower borrowing rates revived consumer demand. To offset lower interest earnings, financial institutions turned toward fee-based income, including payments, cards, and investment advisory services. Net fee and commission income grew by 4.5% year-over-year, proving essential to keeping balance sheets healthy.
This shift helped average profit per client rise by 2.1% across Europe, though performance differs significantly between regions. For example, Eastern Europe registered an impressive 11.1% gain in profit per client, while the Nordics and Switzerland saw profit per client drop by 9.1%. Operational efficiency also varied across borders.
Southern Europe stood out for cost control, led by Portugal with an exceptional cost-to-income ratio of 32%, whereas France lagged behind at 67%. Meanwhile, the United Kingdom remained particularly vulnerable to rate cuts, with 91% of its banking revenue tied directly to interest income.
Evolving impact of AI
Technology investments continue to reshape operations, with European institutions spending around €9.15 billion on AI in 2025, a figure projected to grow by over 33% annually. Rather than replacing workers, AI is improving overall productivity, helping lift income per employee by 3.1% and business volume per employee by 7%. Across Europe, output per employee has roughly doubled since 2008, while volume per branch has nearly tripled.
Beyond operational streamlining, the broader introduction of AI is altering how monetary policy spreads through the economy. Real-time risk modeling, automated loan pricing, and rapid deposit shifts mean rate adjustments transmit faster than before. This tighter linkage could lead to greater earnings volatility for banks, making continuous operational discipline the true deciding factor for future market leaders.
“Operational efficiency and digital investments are becoming the heartbeat of banking,” said Roberto Freddi, partner at Kearney. “The true advantage, however, lies in transforming them into catalysts for more human-centric customer experiences.”
Continue delivering value
Delivering strong results in a more demanding environment will require banks to execute a far more deliberate strategy. Rather than depending on single macroeconomic trends, top institutions are diversifying into wealth management, protection products, and transaction services to build recurring fee income. At the same time, maintaining credit discipline and careful pricing will prove vital as loan demand recovers under lower interest rates.
Sustaining profitability going forward means replacing simple cost-cutting with continuous, intelligent automation. Ongoing macroeconomic uncertainty and shifting funding costs mean institutions can no longer take past resilience for granted. Only the banks that master both precise strategic planning and rapid operational execution will secure lasting competitive advantage.
“Retail banks are under pressure – from a sluggish macroeconomic outlook and global uncertainty to declining interest rates. This is a moment to forge smarter, more resilient models,” said Daniela Chikova, partner at Kearney.
