Since 2000 the European banking sector observed high earnings volatility both across time and among individual banks, culminating in a sharp decline in profitability in 2008, which remained thereafter at much lower levels compared to the pre‐crisis norm. In this paper, we use panel data on a sample of European banks to answer the following questions: (i) how does bank profitability respond to macroeconomic variables? (ii) Is there heterogeneity in that response? To identify the effect of GDP growth on profitability, we use an instrumental variable approach with world GDP growth as an instrument. We find that there is a positive association between real GDP growth and bank profitability due to the procyclicality of impairments. We also find that, on average, European banks benefit from higher reference rates and steeper yield curves.