Are European banks still a buy? Barclays says fundamentals remain strong

Barclays' recent conference highlights strong fundamentals for European banks, driven by robust earnings, controlled costs, and normalizing risk provisions, with supportive net interest income trends. Despite polarized investor views on short-term performance, the sector is seen as the most attractive within financials, with expectations for improved Return on Tangible Equity (ROTE) by 2026-27 and significant capital return potential. While cross-border M&A is emerging as a new driver, bank taxes and political uncertainty remain key risks, particularly affecting valuations in France and the UK, even as Iberian banks benefit from supportive macro backdrops.

Analysis

A recent Barclays conference survey of 29 European lenders reveals a sector with strong underlying fundamentals, yet facing polarized investor sentiment. The earnings outlook is described as robust, primarily driven by revenues with particular strength noted in the U.K., French, and German markets. This is supported by controlled costs, normalizing risk provisions without signs of abnormal stress, and a favorable net interest income environment as Eurozone rate cuts are nearly complete and loan growth shows momentum. Despite these strengths, investor views on 12-month performance are split, with as many expecting the sector to outperform as to underperform. The primary risks identified are bank taxes, which over half of respondents cited as the biggest downside, and political uncertainty. This has led to uneven valuations, with French and U.K. banks trading at low multiples due to political risk, while Iberian banks are favored for their supportive macro backdrops and capital buffers. A notable long-term shift is the majority investor expectation for Return on Tangible Equity (ROTE) to improve in 2026–27, signaling a departure from past skepticism. Capital allocation is a key theme, with excess capital fueling potential for buybacks and a growing appetite for cross-border M&A, which 25% of investors now cite as a reason to add exposure.

Key Decisions for Investors

• Investors should consider a geographic tilt towards Spanish and Italian banks, which are currently favored for their supportive macroeconomic environments and potential for superior capital returns.
• Monitor political developments and fiscal policy closely, as new or increased bank taxes are identified as the single largest downside risk for the sector's performance.
• Screen for institutions with significant excess capital and stated commitments to shareholder distributions, as buybacks remain a highly valued theme and a key potential driver of total return.
• Pay attention to emerging cross-border M&A activity, as it is becoming an increasingly important catalyst for re-rating and could unlock value in both acquirers and targets.