Europe's Banks Not out of sickbed.

LONDON—European banks plan to pay back €61 billion ($81 billion) of emergency central-bank loans they took out last year, a smaller-than-expected amount that highlights the continued fragile state of the Continent's financial system.

The planned repayments by 356 lenders come after banks a month ago paid back €137 billion of the cheap, three-year loans—a surprisingly large figure. But the size of the latest repayment, which was announced by the European Central Bank on Friday, was only about half what many analysts had expected.

All told, banks will have repaid about 21% of the €1 trillion in loans that the ECB doled out in an effort to douse an escalating financial crisis in late 2011 and early 2012.

The smaller repayment figure indicates the "European banking system is in a less healthy state than thought," said Lyn Graham-Taylor of Rabobank in London.

The Wall Street Journal

The ECB hasn't disclosed detailed data about which banks, or even which countries' banks, are repaying the emergency loans. But piecemeal disclosures by banks and central banks in individual countries indicate that the repayments have been clustered among economically stronger northern European countries and a handful of big banks from Europe's struggling periphery.

In Spain, for example, banks last month repaid a total of about €45 billion in loans, according to a person familiar with the matter. But most of that—more than €35 billion—came from two giant lenders, Banco Santander SA SAN.MC +2.38% and Banco Bilbao Vizcaya Argentaria BBVA.MC +1.76% SA.

The slower-than-expected pace of loan repayments this month appears to reflect a cautious, wait-and-see approach. Senior bank executives say that while they're confident Europe's financial system is gradually healing, uncertainties abound. Chief among those are the weak state of the euro zone's economy and the threat of political instability in countries like Italy, which is holding closely watched national elections this weekend.

Santander finance chief Jose Antonio Alvarez, whose bank repaid €24 billion of the loans last month, said on a conference call recently the company is weighing whether to repay more but is using the remaining funds "as a cushion basically for insurance." The bank's Portuguese unit hasn't repaid the €5 billion it borrowed and is holding it "just for safety's sake," he said.

Société Générale SA GLE.FR +1.84% Chief Executive Frederic Oudea said last week that the giant French bank had started gradually repaying the ECB funds it borrowed last year. But the bank isn't in a rush to repay the loans all at once because they are relatively inexpensive and serve as a backstop should the Continent slip back into a severe crisis, Mr. Oudea said.

The three-year loans carry an annual interest rate of 0.75%—well below what most banks would have to pay to borrow for the same period in the bond markets.

But stronger banks nonetheless have been scrambling to repay at least a portion of the loans in order to trumpet their financial strength to investors. Plus, many banks have simply parked the borrowed money on deposit at central banks, which don't pay interest on such deposits. Executives at banks such as Germany's Commerzbank AG CBK.XE -1.26% say they're losing tens of millions of euros by depositing the loans at central banks.

The ECB's big loans were needed to shunt money around a blockage in the European banking system. In normal times, banks in Germany and other savings-rich countries would lend to their credit-hungry peers in Spain and elsewhere. That stopped in the crisis, and so the ECB stepped in to make the loans the commercial banks wouldn't. More than half of the emergency lending went to Spanish and Italian banks.

If the banks no longer need the funds, it is a sign that the crisis, at least in the banking system, is easing. But it appears to be the healthiest banks that are repaying the loans, alongside banks in safer countries that took them more as a precaution.

Data from Germany's Bundesbank show German banks shedding €21 billion of long-term loans in January; they had €70 billion the month before. By contrast, Italian banks in January got rid of less than €2 billion of the €268 billion in long-term loans they had in December, according to the Bank of Italy. And Portuguese banks' long-term borrowings declined only €3.6 billion in January, from €49.3 billion the prior month, according to the Bank of Portugal.

The three central banks' figures include long-term loans besides the three-year tranches, but the three-year loans represent the lion's share of what the ECB has doled out. Data aren't yet available for Spain or France.