European banks have enjoyed a remarkable resurgence in the past 2-1/2 years after more than a decade of rock-bottom interest rates and concerns about euro zone government debt, which soured investor sentiment towards their stocks.
The sector is now one of the best performing in Europe, with the STOXX Europe Banks index .SX7P at its highest since late 2007 and up 143% since early 2024, as higher rates boost interest income and loan demand swells despite continued weakness of the region's economy.
In some cases, investors look beyond headline figures.
Britain's Barclays BARC.L reported a 17% rise in first-half profit on Tuesday, better than expected, but shares dropped as analysts said its equities performance undershot market expectations while costs came in higher.
France's BNP Paribas BNPP.PA last week also beat forecasts with a 33% year-on-year profit rise in the second quarter.
Domestically focused retail lenders, such as Britain's NatWest NWG.L, Italy's Intesa Sanpaolo ISP.MI and Spain's CaixaBank CABK.MC have also seen their shares recover dramatically.
Despite their sustained rally, European lenders are worth a fraction of their Wall Street rivals. JPMorgan is closing in on a $1 trillion valuation, while the most valuable European lenders today are HSBC HSBA.L and Santander SAN.MC, worth £266 billion ($353 billion) and €180 billion ($205 billion) respectively. European banks remain valued far below U.S. lenders, based on a price-to-book value — a common measure of valuing banks.
The region's lenders are also constrained by regulation and political resistance to cross-border consolidation, analysts say. While some central bankers say such deals are needed for European banks to compete globally, UniCredit's CRDI.MI nearly two-year pursuit of Commerzbank CBKGn.DE demonstrates the difficulty.
The euro zone economy's subdued growth and its vulnerability to the fallout from conflict in the Middle East remain concerns for European lenders, despite little sign of rising bad loans or provisioning yet.
Marina Zavolock, chief European equity strategist at Morgan Stanley, said that higher inflation on the back of rising energy prices could benefit European banks, through higher interest rates.
The appeal for investors is also partly the low base from which European banks have recovered. Lombard Odier analysts said in a note this month that although European banks were benefiting less from capital market activity than U.S. rivals, the outlook remained favourable with a stable economic backdrop and rates rising again.
"We think that improving returns on equity are not yet reflected in valuations for European banks," they said.
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