European bank stocks had a great year in 2025, with some institutions more than doubling in valuation, marking their best year since 1997. But the sector sold off heavily during the U.S.-Iranian conflict in March, bringing three years of near-linear positive returns to an abrupt halt. The STOXX 600 Bank Index is down 1% since the beginning of the year, after falling as much as 10% during the escalation of the conflict. But Citi analysts believe their bullish stance on European banks remains, and in a note published Thursday they outlined the top three banking candidates. Analysts cited several reasons for optimism. First, earnings per share estimates are still raised. Citi attributed this to an “excellent” earnings outlook, but also noted that many banks were also offering better cost guidance. Analysts also believe fears of disruption related to the Middle East conflict and worries about private confidence are “overstated.” “We believe the post-Middle East conflict decline is primarily due to positioning rather than fundamental factors,” they write. “The forward curve now points to the ECB raising interest rates twice this year, (which) supports earnings.” The three names Citi is most confident in are HSBC, NatWest and SocGen. Analysts upgraded Lloyds to ‘buy’ and Deutsche Bank to ‘neutral’. European banks have excess capital, which Citi says can be used through share buybacks, increased lending and M&A, but questions remain about the best way to achieve higher stock prices. “Banks also appear to be more willing to spend money on M&A, and we expect this trend to continue, but the stock price reaction has been mixed so far,” Citi said. But Citi added that it sees “significant obstacles” to a potential deal between UniCredit and Commerzbank.
