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European Banks Surge: Citi Predicts Continued Growth
9 Apr
Summary
- European bank stocks had their best year since 1997 in 2025.
- A March conflict caused a sector sell-off, but Citi sees optimism.
- ECB rate hikes are expected to support bank earnings this year.
European bank stocks experienced a remarkable 2025, marking their most successful year since 1997, with some lenders more than doubling in value. This positive trajectory, which had been nearly linear for three years, faced an abrupt halt in March due to the U.S.-Iran conflict.
The Stoxx 600 Banks index, which fell as much as 10% during the conflict, is currently down 1% year-to-date. However, analysts at Citi express strong optimism for the sector's future performance.
Citi analysts attribute their positive outlook to several factors, including upward revisions in earnings per share estimates driven by a superior revenue outlook and improved cost guidance from various institutions. They also view concerns about private credit and the Middle East conflict as exaggerated.
Furthermore, analysts point to the forward curve, which suggests two European Central Bank rate hikes this year, a development expected to bolster bank earnings. Citi's top recommendations include HSBC, NatWest, and SocGen, with upgrades for Lloyds and Deutsche Bank.
European banks are holding substantial excess capital, presenting opportunities for buybacks, loan growth, or M&A. While M&A activity is expected to continue, its impact on share prices has been varied. Citi anticipates major obstacles for a potential UniCredit/Commerzbank deal.
