NatWest and HSBC top tips as European banks 'have further to run'

Citi says the European banking rally can continue into 2026 and names HSBC and NatWest among top picks, forecasting a sector NII recovery next year, about 4% non‑NII growth and positioning its estimates at least 5% above 2027 consensus for those names; it also expects a c.7.5% capital return yield supported by roughly a 75% payout ratio. The broker highlights undemanding valuations—sector trading at 1.6x price‑to‑tangible book with RoTE around 16% and an implied cost of equity near 11%—while warning that a sharp economic slowdown or a flattening yield curve would be negative and that wholesale banks (Barclays, HSBC, BNP, SocGen) carry higher implied CoEs. On payments, Citi views stablecoin disruption as overstated given on/off‑ramp frictions and rising issuer supervision, arguing future differentiation will depend on programmability and integration and may chiefly affect smaller merchants and underserved corridors.

Analysis

Citi recommends overweighting European banks into 2026, naming HSBC and NatWest as top picks and explicitly forecasting sector net interest income (NII) returning to growth in 2026 with non‑interest income rising about 4% that year. The broker projects a c.7.5% capital return yield supported by roughly a 75% payout ratio and states its models are at least 5% above 2027 consensus for HSBC and NatWest, implying near‑term upside to consensus earnings.

Citi describes sector valuations as undemanding at 1.6x price‑to‑tangible book with a return on tangible equity around 16%, yielding an implied cost of equity of roughly 11% versus a long‑run average near 12%, which underpins its constructive view despite somewhat less attractive valuation than earlier. It also flags differentiation within the group, with wholesale banks (Barclays, HSBC, BNP Paribas, Société Générale) carrying the highest implied cost of equity and therefore higher risk premia.

Citi identifies the principal downside as a sharp economic slowdown or a flattening yield curve that would materially pressure NII, though it does not make that its base case. On payments disruption, Citi views stablecoin risk to bank business models as overstated given on/off‑ramp frictions and increasing supervision that should narrow cost advantages over time, with any meaningful stablecoin traction likely dependent on programmability and niche corridor adoption.

Key Decisions for Investors

• Consider overweight positions in HSBC and NatWest within European bank allocations given Citi's top‑pick status and its models running at least 5% above 2027 consensus alongside an expected NII recovery
• Monitor NII momentum and the yield curve as primary tactical indicators and be prepared to trim cyclically sensitive bank positions if a sharp economic slowdown or yield‑curve flattening materializes
• Favor banks with visible capital return plans and diversified non‑NII drivers—notably names with Asian wealth exposure (HSBC, Standard Chartered) or strong domestic franchises (NatWest, Lloyds)—using 1.6x P/TB and implied CoE (~11%) as valuation anchors
• Do not pre‑emptively over‑hedge banking exposure for stablecoin disruption; instead track regulatory developments and on/off‑ramp progress because Citi expects cost advantages to narrow and disruption to be niche and execution‑dependent