European banking stocks have surged to their highest levels since the 2008 financial crisis, driven by a combination of rising long-term interest rates, economic resilience, and renewed investor confidence. The rally has marked a significant reversal for a sector that has long lagged behind its U.S. counterparts and struggled with weak earnings and regulatory pressure.
Record Highs for Major Banks
This week, shares of several leading European banks reached record or near-record levels:
- HSBC hit an all-time high ahead of its Q2 earnings release, although shares slightly declined afterward due to results falling short of expectations.
- Barclays and Santander posted their highest levels since 2008.
- Italy’s UniCredit climbed to its highest share price since 2011.
These gains reflect a broader trend: bank stocks on the Stoxx 600 index are up 34% year-to-date, outperforming U.S. peers and on track for their best performance since 2009.
Why the Rebound?
Analysts attribute the resurgence to several factors:
- Rising long-term interest rates have substantially increased banks’ net interest income — the margin between what banks earn from loans and pay on deposits.
- The economic environment in Europe has remained relatively stable, supporting optimism about loan performance and profitability.
- Many banks have enhanced operational efficiency and diversified income streams, such as investing in wealth management.
“Europe’s banks have shifted from pariah status to market darlings,” said Justin Bisseker, a European banks analyst at Schroders.
Valuations Still Lag U.S. Rivals
Despite the rally, European banks remain relatively undervalued:
- Many are only now trading at book value, compared to 2.4x book for JPMorgan Chase and 2x for Goldman Sachs, according to FactSet.
- Their forward price-to-earnings ratio is around 10x, versus 13x for U.S. banks, based on Bloomberg data.
This valuation gap is attracting investors, who see European banks as “cheap and uniquely positioned for a pick-up in domestic demand,” according to Luca Paolini, chief strategist at Pictet Asset Management.
Regulatory Reforms and Interest Rate Tailwinds
Following the financial crisis, European banks built up large capital buffers under regulatory pressure, limiting dividends and buybacks. At the same time, a prolonged period of ultra-low interest rates suppressed profitability.
The post-COVID shift in monetary policy changed that landscape:
- Central banks raised interest rates to combat inflation.
- Quantitative easing programs were rolled back.
- Yield curves steepened, with 30-year bond yields in Germany and the UK now 1.3 to 1.5 percentage points higher than two-year yields.
These dynamics have created a favorable environment for banks to generate profits from traditional lending.
Challenges Ahead: Can the Momentum Last?
The sustainability of this momentum remains uncertain. Analysts are watching whether banks can maintain strong earnings if long-term rates stabilize or decline. Some lenders have tried to insulate themselves by expanding wealth management services, but other growth strategies — such as cross-border mergers — face political resistance.
Recent high-profile merger attempts, including BBVA’s bid for Sabadell and UniCredit’s move on BPM, have encountered regulatory and political hurdles, limiting consolidation prospects.
“Banks appear the cleanest shirt in the basket,” said Francesco Sandrini of Amundi, “but there’s a growing feeling the best may be past.”
Outlook: Discounted but Promising
Despite uncertainties, many analysts remain optimistic:
- Return on tangible equity for many European banks now exceeds 10%, a sign of improved profitability.
- Valuations continue to trail global peers, suggesting further upside potential.
As Bisseker of Schroders notes, “The good news is that European bank valuations remain discounted compared with banking sectors elsewhere in the world. Further convergence is likely.”
