European banks have rebounded from a lackluster first quarter, with the Stoxx 600 Banks Index rising approximately 21% year to date, comparable to the 22% increase in the KBW Nasdaq Bank Index. This growth, however, is a significant slowdown from the previous year's remarkable 66.95% surge, driven by strong profitability and a shift in investor focus towards Europe.
Despite challenges such as lower interest rates and geopolitical volatility, European banks have maintained robust profits, enabling them to offer healthy dividends and initiate share buybacks. Analysts from Citi have identified top picks in the sector, including ABN, NatWest, and Societe Generale, citing the banks' attractive capital return yields.
In the second quarter, 83% of banks surpassed pre-tax profit expectations, with notable earnings upgrades from Caixabank, HSBC, ABN, and Santander. However, Citi warns that the current bull run may be nearing its end, as valuations are no longer excessively cheap and earnings upgrades are becoming more common across other sectors.
Future growth may hinge on acquisitions or increased business volumes, particularly as banks look to leverage opportunities in AI, although this could reduce the frequency of buybacks that have historically supported share prices