European bank shares still have appeal after record wen

(Bloomberg) – European bank shares have just linked their record quarter match and the good news for bulls is that their performance looks far from stretched out. The Stoxx Europe 600 Banks index rose for a 12th quarter, which was waved by resilient earnings and shareholder payments. It is the best performing sector in the region this year, which is progressing 47%, but still not from its peak. Bank profits have risen this year thanks to stronger fee and trade income and reduced costs, which will delay expectations among some that falling interest rates would be earned. Capital buffers have remained strong, allowing them to increase the repurchase of shares and dividends. “The realization that profitability would not disappear once the rates were normalized again was powerful, but in our opinion there is further to go,” said Andrew Stimpson, KBW’s head of European bank research. Societe General SA, Commerzbank AG and Banco Santander SA characterize the rally, each more than 90% since the beginning of the year. Skepticism about whether profits like this were sustainable increased, especially as the European central bank brought back its key rate to 2%. But the configuration for banks looks just as positive as ever. The exchange market excludes any further rate cuts, just as the European economy is expected to recover strongly, increasing by massive fiscal stimulus in Germany and infrastructure spending from the European Union. It is a good environment for borrowers to thrive, and analysts take note and increase their estimates. For the Citigroup Inc. -Team led by Andrew Coombs is the relative earnings momentum for banks especially healthy. They enjoyed increased consensus estimate upgrades this year, powered by non-nets interest income and costs with costs. The broader Stoxx 600 forward earnings are flat this year, while none of the other sector indices of the top performing sector are at a distance from earnings. “While this divergence continues, we expect sector rotation to continue,” the analysts said in a note. They prefer to own names that are still as sharp as peers, and which offer the EPS upgrade of potential and attractive returns. They cited HSBC Holdings PLC, Intesa Sanpaolo Spa and Natwest Group PLC as examples. Due to their extensive rally, bank shares are not as cheap as before. With a forward price-to-earnings ratio of about 10, absolute valuations are now in line with historical levels. The sector is still cheaper on a relative basis, trading at a discount of about a third to the wider Stoxx 600 versus a long -term average of 25%. This leaves the space for further upside down. “The redistribution can continue,” KBW Stimpson said. “It’s very powerful to tell long -term investors that banks are still on a path that things are getting better.” Even after a 162% surge over the past twelve quarters, the Banks index remains more than 40% below its record height. Stimpson benefits banks with a high return on equity that can produce loan growth. He named Bank of Ireland Group plc., Earth Group Bank AG, Intesa Sanpaolo Spa, KBC Group NV and Natwest Group PLC. as his best ideas. A collection in M&A has also favored the sector. Consolidation continues with APACE, with Santander’s TSB transaction and Banca Monte Dei Paschi di Siena Spa’s takeover of Mediobanca Spa among the largest transactions of 2025. There are challenges for rosy prospects, with the Italian and Polish governments in the past few months. Fund managers became less clumsy, with 37% founding European banks attractive in the latest survey of Bank of America Corp, of 58% a month before. Attention will soon be turned to earnings, with a Uni-Redd-Cup reporting on the third quarter for the sector on October 22. Focus across the industry will be on the resilience of the businesses, on fees and terms, as investors judge the strength of the economic recovery of Europe. For borrowers with large investment banking units, the bakkie in the market activity must be a boost, while M&A will remain an important theme for some lenders, including Spain’s BBVA SA and the Unicredit of Italy. Shareholders returns will also be the key to keeping investors positive. Bloomberg briefing strategists, including Kaidi, expect that total payments in the financial sector will again exceed other sectors. Banks retain the top position in their scorecard in the industry, backed by stronger technically, which accelerates raising earnings and stronger review trends. “The valuation of the European banking sector looks well advanced and, in the future, we expect it to be just a slightly better than the broader stock market,” says Roberto Scholes, 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 hang between 8% -11%-about half of dividends, half of share appreciation in the coming years.” -With help from Jan-Patrick Barnert. More stories like these are available on Bloomberg.com © 2025 Bloomberg LP