Important points
European banks are aiming for their strongest year since 1997, with the Stoxx 600 banking index up nearly 60% since the start of the year. The region’s financial institutions enjoyed a strong earnings season, with HSBC and UBS posting higher profits in the third quarter, and valuations for some institutions including Commerzbank and Société Générale more than doubling in the past 12 months. All this caps off what Benjamin Goy, head of European financial research at Deutsche Bank, called a “great year” for the sector. “European banks are well-capitalized. Most or all of them are in the area of significant overcapitalization,” Goy told CNBC. .SX7P Year-to-date Mountain Stoxx 600 European Bank Index. But as financial institutions look to maintain momentum through 2026, the big question weighing on executives now is what to do with this excess capital. While opportunities for organic growth improve, the bank is now “very profitable and could do more,” Goy said. Share buybacks and capital dividends are frequently used and carry low execution risk. But next year, the focus is expected to shift to another option: inorganic growth, or M&A activity, which will allow banks to diversify their revenue streams and enhance growth. “That’s something this industry has been missing for almost a decade,” Goy said. “Confidence is returning among management teams. Investor support is increasing, and announced deals are typically actually profitable, so even the acquirer’s stock price tends to rise. We expect to see more of this.” Lee told CNBC’s “Europe Early Edition” on Dec. 9 that both Italy and the U.K. are consolidation hotspots, with activity dominated by domestic “bolt-on” deals where “execution risk is low, synergies are strong… (and profitable deals) easy to announce.” Several of Germany’s leading candidates this year are expected to be involved in such activities, including Monte dei Paschi, Erste Group, Bank of Ireland and Barclays. Competition for so-called “product factories” such as asset management and insurance is likely to be particularly intense in the M&A space, he added, but cross-border activities remain difficult due to increased execution risk, typically lower synergies, and political scrutiny. CBK-DE YTD Mountain Commerzbank AG. Investment strategists also pointed to strong loan and deposit growth, which is expected to further support the sector’s resilience in 2026. RBC BlueBay Asset Management said European banks have benefited from a growing desire among global investors to diversify their equity exposure away from U.S. tech, with cyclical sectors including financials posting repeated profit increases this year, leading to reratings. Sharon Bell, senior European equity strategist at Goldman Sachs, said European banks were now in a “fairly consensus trade”, but added that a steeper yield curve and further growth in the global economy next year would still provide “a good environment for banks”. “This is also a sector that still has a single-digit P/E. We’re talking about where to diversify away from expensive, concentrated markets like the U.S. From that perspective, European banks can’t be a better diversifier,” Bell said on CNBC’s “Squawkbox Europe” on Dec. 11. Deutsche Bank’s Goy said the key revenue drivers supporting Power Bank’s growth through 2026 will be increased net interest and fee income. He said Europeans were becoming more accustomed to it. Investments in capital markets are a “very healthy driver for fee income growth” and will help offset the low interest rate environment as the European Central Bank keeps interest rates on hold. “Net interest income remains the most important source of revenue for the sector,” Goy said. “The rate cuts by the ECB and other central banks have created some headwinds, resulting in a slight decline in net interest income in 2025. But now that most central banks have put their interest margins on hold and interest margins have stabilized, this volume growth is starting to appear again…This is a big turnaround.”
