This points to risks from further valuation losses, especially for leveraged and liquidity-constrained institutions. Higher interest rates are supporting euro area banks' profitability, with interest margins improving. Bank profitability has in fact steadily strengthened throughout 2022 mainly due to lower operating expenses and higher operating income.
The outlook is, however, clouded by a weaker macroeconomic backdrop which is not yet reflected in loan loss provisions and overall lending volumes. Inflation is also pushing up operating expenses for banks, whose profitability was strongly supported by cost-cutting efforts over the past years.