European banks enjoyed a record year for returns in 2025, in which the Euro Stoxx Banks index surged 98.1%.
Financials, and banking stocks in particular, was one of a narrow collection of sectors driving European market returns as a whole last year. Given the record run, investors are beginning to ask whether the sector continue its momentum in 2026.
Portfolio Adviser asks European and global fund managers for their views on the sector moving forward.
What has driven recent returns?
The rally in European banking stocks has been stark, with the sector up over 331.7% over the five years to the end of last year.
Société Générale was the highest returning stock within the 29-holding Amundi Euro Stoxx Banks ETF last year, returning 159.28%, according to Morningstar data. Names such as Commerzbank, Banco Santander and ABM AMRO Bank also returned over 100% last year alone. Strikingly, every member of the index fund was up for the year.
The sector has enjoyed multiple tailwinds which have contributed to the run since the Covid 19 pandemic. Looking at recent financial results from last year, Marc Stacey, a senior portfolio manager within RBC Bluebay Asset Management’s investment grade team, highlights a particular trend to demonstrate the remarkable run.
“The last quarter saw the vast majority of the sector report earnings, with trends continuing in line with our bullish view on fundamentals,” he says. “Pre-provision operating profits beat on aggregate by 4%. This is the 27th quarter in a row of outperformance. This is an incredible statistic, given it’s against increasingly lofty market expectations.”
European equities more broadly have also participated in a value rally, with financials one of the key beneficiaries.
During the Covid 19 pandemic, European financials were restricted by regulators on dividends and share buybacks. These limits, combined with uncertainty around the longer-term economic impact, pushed valuations to meaningfully depressed levels, notes Allspring Global Investments global equity portfolio manager Jonathan Drexel.
“As clarity returned and restrictions were lifted, valuations reverted toward more historical norms,” he says. “Since the pandemic, European banks have significantly improved both profitability and balance sheet strength, leading to a rerating of the sector alongside renewed earnings momentum.”
Hywel Franklin, portfolio manager, Mirabaud Discovery Europe
‘With Europe continuing to rebound and investor flows gradually shifting, the environment remains supportive’
However, Frank Wedekind, global equity research analyst at William Blair Investment Management, says the outperformance in European Banks is not just part of a value rally or a ‘fluke’, rather it is due to a combination of sector dynamics.
He particularly notes the fundamental lack of economic growth in Western Europe, which has forced the sector to adapt to stay competitive. Management teams have had to become more efficient, adapt their product range and, in many cases, consolidate.
The changing interest rate environment has also contributed. “European banks were on average very well managed, lean machines before rates inflected,” Wedekind says. “The higher rates then fell on very fertile ground, that dropped through to the bottom line.”
What’s the investment case from here?
Moving forward, Mirabaud Discovery Europe fund portfolio manager Hywel Franklin says the sector still offers meaningful upside, with many European financials still set to deliver 10–15% annual earnings growth alongside substantial dividend payouts.
“Valuations remain compelling, especially versus the US, where parts of the market now trade at stretched multiples,” he says.
“With Europe continuing to rebound and investor flows gradually shifting, the environment remains supportive. Well-run banks such as Credem in Italy highlight how undervaluation and strong fundamentals can coexist.”
In terms of positioning, Franklin is maintaining the fund’s exposure to the sector.
“Earnings momentum is intact, valuations remain attractive, and the sector continues to benefit from improving macro conditions. More broadly, Europe appears to be in the early stages of a re-rating cycle, and financials remain one of the clearer beneficiaries.”
Frank Wedekind, global equity research analyst, William Blair Investment Management
‘The sector valuation is not as attractive as it has been and as many stocks are trading close to or in some cases above what we would consider as fair value, we have become a lot more selective’
Considering the re-rating that has taken place within the sector already, however, William Blair’s Wedekind says the focus from here is on being selective with exposure.
“We continue to like the space and continue to see attractive investment stories for many individual names. But, as the sector valuation is not as attractive as it has been and as many stocks are trading close to or in some cases above what we would consider as fair value, we have become a lot more selective.”
Markus Hansen, portfolio manager at Vontobel Quality Growth, adds his focus within the sector is on countries with a disciplined competitive banking market set up, such as the UK, Scandinavian nations and Greece.
“We have been tactically adding to the names we own: NatWest Group, Den Norske Bank DNB, Svenska Handelsbanken and Eurobank Ergasias.
“We also think international investors have been cautious towards European banks given the recent history and there may still be political backdrop worries, hence focus on more quality, sustainable growth names is key for us.”
“We maintain our conviction in the banks over the medium term due to their high and attractive shareholder returns and modest valuation compared to historic averages, despite the recent strong performance,” adds Brian Hall, co-manager of the BlackRock Greater Europe Investment Trust.
