European bank stocks posted their strongest year on record in 2025, fuelled by resilient growth, high margins, and capital returns. Looking to 2026, the focus is now shifting to earnings growth, efficiency gains, and sustained shareholder payouts.
European bank equities have delivered a historic rally in 2025, marking one of the strongest years on record for the sector and signalling a decisive shift in investor sentiment after more than a decade of underperformance.
The EURO STOXX Banks Index is up 76% year-to-date as of 12 December, putting it firmly on course for its best annual performance ever, surpassing even the 74% surge recorded in 1997.
What makes the rally particularly striking is its breadth. Every constituent of the index has posted positive returns, while a growing cohort of lenders has achieved triple-digit gains.
Among the standout performers are Société Générale and Commerzbank, whose shares have risen 139% and 136% respectively. Spain’s Banco Santander has climbed 110%, while ABN Amro is up 102%.
Other high-flyers include BBVA (+101%), CaixaBank (+96%), Deutsche Bank (+92%), Bankinter (+86%), and Bank of Ireland (+84%).
Why did European banks rally in 2025?
The sector benefitted from what many strategists describe as a macroeconomic “sweet spot”.
Interest rates remained high enough to support margins, economic growth proved strong enough to protect asset quality, and capital buffers were ample enough to reward shareholders.
The European Central Bank halted its rate-cutting cycle in June 2025, keeping the deposit facility rate at 2% ever since. While well below the peaks of 2023–24, policy rates stayed comfortably above pre-pandemic norms, allowing eurozone lenders to preserve elevated net interest margins.
At the same time, growth outcomes exceeded the market’s cautious expectations. Germany avoided a deep industrial recession, southern Europe continued to benefit from strong tourism and EU investment flows, and fiscal policy across the bloc remained mildly supportive.
Even fears of a broader economic shock stemming from Donald Trump’s renewed tariff agenda failed to materialise in a meaningful way. Credit conditions held up, loan losses stayed contained, and confidence in bank balance sheets improved. Capital returns also became a central part of the equity story.
Most European banks are operating well above regulatory capital requirements, with CET1 ratios comfortably in the mid-teens. These ratios are used to determine lenders' ability to survive a challenging monetary event.
Strong capital requirements allowed management teams to step up dividends, share buybacks, and other forms of shareholder distribution.
Valuations amplified the rally. European banks entered the year trading at deep discounts to book value and to global peers, reflecting years of negative rates, heavy regulation, and subdued returns.
Finally, global portfolio flows played their part. International investors rotated into European value stocks and financials, while a stronger euro improved the relative appeal of euro-area assets for dollar-based investors.
European banks outlook 2026: What comes next?
Looking ahead, investment bank analysts remain broadly constructive on the European lenders.
In a recent note on the sector, Goldman Sachs analyst Chris Hallam said investor focus is likely to move away from rates and credit towards growth and efficiency in 2026.
Goldman expects growth dynamics to be driven by ongoing deposit inflows, deposit-centric strategies, and a gradual strengthening in loan growth.
Analysts describe the operating backdrop as “better for longer”, with returns sustained at mid-teens levels through the medium term.
The sector, Goldman argues, remains well capitalised and highly capital-generative, supporting continued capital deployment through organic growth, selective M&A, and shareholder distributions.
Valuations, meanwhile, still look undemanding.
Goldman forecasts double-digit earnings per share (EPS) growth for the sector, despite single-digit price-to-earnings multiples. In other words, banks are making money but their valuations aren't keeping pace.
Goldman’s highest-conviction European bank stocks by potential upside include UBS Group (34%), UniCredit (29%), Banco BPM (29%), Julius Baer (25%), Alpha Bank (21%) and KBC Group (21%). This suggests that, even after a blockbuster 2025, the sector’s rally may not yet be complete.
After a historic 2025, European banks enter 2026 no longer as a deep-value recovery trade, but as a sector increasingly judged on growth execution, efficiency gains, and capital discipline.
