(Bloomberg) — European banking stocks have just matched their record quarterly winning run and the good news for bulls is that their performance looks far from stretched.
The Stoxx Europe 600 Banks index has risen for a 12th straight quarter, buoyed by resilient earnings and shareholder payouts. It’s the best performing sector in the region this year, advancing 47%, but still well short of its all-time high.
Bank profits have soared this year thanks to stronger fee and trading income and reduced costs, defying expectations among some that falling interest rates would hit earnings. Capital buffers have remained robust, allowing them to increase share buybacks and dividends.
“A realization that profitability would not disappear once rates normalized again has been powerful, but in our view there is further to go,” said Andrew Stimpson, KBW’s head of European banking research.
Societe Generale SA, Commerzbank AG and Banco Santander SA typify the rally, each up more than 90% since the year began. Skepticism over whether gains like these were sustainable have grown, especially as the European Central Bank brought its key rate back to 2%.
But the set-up for banks looks as positive as ever. The swap market is ruling out any further rate cuts, just as the European economy is expected to recover strongly, boosted by massive fiscal stimulus in Germany and infrastructure spending from the European Union. That’s a good environment for lenders to keep thriving, and analysts are taking note, raising their estimates.
For the Citigroup Inc. team led by Andrew Coombs, relative earnings momentum for banks is particularly healthy. They have enjoyed elevated consensus estimate upgrades this year, driven by non-net interest income and progress on costs. Broader Stoxx 600 forward earnings are flat this year, while none of the other top-performing sector indexes are remotely close in term of earnings momentum.
“While this divergence continues, we expect sector rotation to persist,” the analysts said in a note. They prefer to own names that are yet to re-rate as sharply as peers, and which offer EPS upgrade potential and attractive yields. They cited HSBC Holdings Plc, Intesa Sanpaolo SpA and NatWest Group Plc as examples.
Because of their extended rally, bank stocks aren’t as cheap as they used to be. With a forward price-to-earnings ratio of about 10, absolute valuations are now in line with historical levels. Still, the sector is less expensive on a relative basis, trading at a discount of about a third to the broader Stoxx 600 against a long-term average of 25%. That leaves scope for further upside.
“The rerating can carry on,” KBW’s Stimpson said. “Being able to tell long-term investors that banks are still on a path of things getting better is very powerful.” Even after a 162% surge over the past 12 quarters, the banks index remains more than 40% below its record high.
Stimpson favors banks with a high return on equity that can deliver loan growth. He named Bank of Ireland Group Plc., Erste Group Bank AG, Intesa Sanpaolo SpA, KBC Group NV and NatWest Group Plc. as his top ideas.
A pick-up in M&A has also benefited the sector. Consolidation continues apace, with Santander’s TSB deal and Banca Monte dei Paschi di Siena SpA’s takeover of Mediobanca SpA among the biggest deals of 2025.
There are challenges to the rosy outlook, with the Italian and Polish governments mulling windfall taxes on lenders in recent months. Fund managers have turned less bullish, with 37% finding European banks attractive in Bank of America Corp’s latest survey, down from 58% a month earlier.
Attention soon turns to earnings, with UniCredit kicking-off third-quarter reporting for the sector on Oct. 22. Focus across the industry will be on the resilience of the businesses, on fees and provisions as investors assess the strength of Europe’s economic recovery.
For lenders with large investment banking units, the pickup in market activity should be a boost, while M&A will remain an important theme for some lenders, including Spain’s BBVA SA and Italy’s UniCredit.
Shareholder returns will also be key in keeping investors bullish. Bloomberg Intelligence strategists including Kaidi Meng expect total payouts in the financial sector to once again exceed other sectors. Banks retain the top spot in their industry scorecard, backed by stronger technicals, accelerating earnings increases and stronger revision trends.
“The European banking sector valuation rerating seems well advanced and, going forward, we expect it to just slightly outperform the broader equity market,” said Roberto Scholtes, head of strategy at Singular Bank. “Now that valuations have normalized, and the sector trades much closer to fair value, shareholders’ returns are expected to hover between 8%-11% — roughly half from dividends, half in share appreciation — in coming years.”
–With assistance from Jan-Patrick Barnert.
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