European bank shares are expected to surge in 2026, buoyed by strong earnings and significant cost savings driven by artificial intelligence. Investor sentiment has shifted positively as concerns over a recession and interest rate cuts from the European Central Bank (ECB) have eased, leading to heightened optimism about the banking sector.
- Jewell added, “What we are seeing is economic resilience within Europe, and that means that even if we do see more rate cuts, that economic resilience will be good for European banks.”
European bank: AI as a Driving Force
Artificial intelligence has become a pivotal factor in attracting investors to European banks. With a scarcity of technology companies in the region, many investors are seeking opportunities in traditional sectors that are leveraging AI. Banks are harnessing AI technologies to enhance operational efficiencies, bolster fraud detection, and reduce staffing costs.
Helen Jewell, chief investment officer for fundamental equities at BlackRock, remarked, “European banks could be a real beneficiary of AI. A lot of the AI story has been focused on the revenue winners, but we also know that when it comes to AI, there is a beneficiary from the cost winners.”
Investor Confidence Rises
UBS has highlighted AI as a primary source of potential upside for banks’ valuations in the near term and their earnings in the long run. However, the excitement surrounding AI is not without caution. The International Monetary Fund and the Bank of England have both warned of potential risks associated with AI exuberance, echoing concerns over the possibility of a dot-com style bust.
The ECB has also cautioned that euro zone banks are facing ‘unprecedentedly high’ risks from various sources, including geopolitical tensions, shifts in trade policies, climate-related crises, and fluctuations in the US dollar, which could impact banks with exposure to the volatile currency.
Impressive Stock Performance
Despite these risks, investors have shown a strong appetite for bank stocks. Notably, shares of Societe Generale (SOGN.PA) have soared by 140% this year, while Commerzbank (CBKG.DE) and Barclays (BARC.L) have seen increases of 125% and nearly 70%, respectively. The European bank stocks index (.SX7P) has climbed more than 60%, building on a 25% gain in 2024 and significantly outperforming the broader pan-European index (.STOXX).
European bank shares are viewed as comparatively inexpensive, trading at approximately 1.17 times their price-to-book value, which is around 40% below their peak in 2007 and notably lower than the 1.7 times valuation of their US counterparts, according to LSEG data.
Positive Earnings Projections
Earnings expectations for European banks have surged. Goldman Sachs has projected that operational costs will grow at a compound annual rate of only 1% between 2025 and 2027, with efficiency improvements anticipated to continue into 2026. The firm expects banks’ cost/income ratios to enhance by 130 basis points year on year, indicating that banks are likely to spend less to generate revenue.
Consulting firm McKinsey has estimated that AI could yield an additional $340 billion annually for the global banking sector, with operational costs potentially dropping by 20%. Even if the benefits of AI implementation take time to fully materialise, UBS believes the anticipated shift will be significant enough to drive up valuations.
Analysts recently raised their net revisions for European banks by the most considerable margin since May 2023, pushing 12-month forward earnings growth expectations to the highest level since 2023, as per IBES data.
Robust Lending Growth
The growth of bank lending to euro zone businesses has remained robust, nearing its highest level since mid-2023. The latest ECB data indicates that credit growth to businesses held steady at 2.9% in October, just shy of the 3% recorded in August—the highest since May 2023. Meanwhile, loan growth to households accelerated to a 2.5-year high of 2.8%, up from 2.6% in the previous month.
Shareholder Returns and Mergers
BlackRock’s Jewell projects that European banks could return between 20% and 25% of their market value to shareholders through dividends and share buybacks over the next three years. Equita co-head of research, Domenico Ghilotti, noted, “If you put together valuation and shareholder remuneration, you still have an asset class that is quite attractive.”
The sector has also seen significant merger activity, exemplified by the takeover of Mediobanca (MDBI.MI) by state-backed Monte dei Paschi di Siena (BMPS.MI), which has reshaped the Italian banking landscape. More deals could be on the horizon as the sector continues to evolve.
Jewell added, “What we are seeing is economic resilience within Europe, and that means that even if we do see more rate cuts, that economic resilience will be good for European banks.”
