UBS stays bullish on European banks

UBS reiterated a bullish view on European banks into 2026, keeping Barclays as a top buy while removing Standard Chartered from its top picks (still rated buy), arguing the sector remains attractively priced and underappreciated for potential AI-driven upside. It said 2025 was “strong” — earnings were upgraded c.10%, dividends and buybacks lifted yield to about 9% and valuations re-rated by more than two P/E points — yet banks still trade at roughly 8.8x expected 2027 earnings, a c.35% discount to the wider market. UBS forecasts earnings growth of 8–9% in 2025–26 and 11% in 2027, highlights that digitalisation/AI could cut costs 15–20% (implying ~20% more pre-tax profit), and expects ongoing asset sales, M&A and capital generation to provide additional upside not fully reflected in current valuations.

Analysis

UBS has reiterated a bullish stance on European banks into 2026 and kept Barclays PLC as a top buy, citing a "strong" 2025 in which consensus earnings were upgraded c.10%, dividends and buybacks lifted yield to about 9%, and valuations re-rated by more than two price-to-earnings points. Despite that re-rating, UBS calculates the sector still trades at roughly 8.8x expected 2027 earnings, a c.35% discount to the wider market, implying valuation upside if earnings momentum persists.

UBS forecasts earnings growth of 8–9% in 2025–26 and 11% in 2027 and highlights Barclays' progress against its existing plan and improving returns; Standard Chartered was removed from UBS's top picks after a strong run but remains rated buy. The broker also notes continued asset sales, targeted M&A and strong capital generation as drivers that could add to earnings beyond current consensus.

UBS identifies artificial intelligence and digitalisation as a material structural catalyst, estimating potential cost reductions of 15–20% that would imply roughly 20% more pre-tax profit, and says 2026 could be the inflection year for AI adoption in financial services. This creates a clear catalyst path (AI-driven cost takeout and M&A) but also timing risk while markets decide how much of that upside to price in.

Key Decisions for Investors

• Consider a selective overweight to European banks given an 8.8x 2027 earnings valuation, c.9% yield from dividends/buybacks and UBS's preference for Barclays as a top buy
• Monitor concrete execution signals on AI/digitalisation (management cost-savings guidance, pilot-to-scale announcements and hiring patterns in advisory) and expand positions only as expected 15–20% cost reductions are evidenced
• Use M&A and capital-return headlines as near-term catalysts and consider trimming names that have already run up (eg, Standard Chartered) while maintaining hedges against macro or timing risk