European banks to outperform in 2026 on strong fundamentals, re-rating: JPM

Investing.com -- European banks are positioned to extend their outperformance into 2026 as stable macro conditions, strong capital generation and further valuation re-rating continue to support the sector, according to JPMorgan’s latest sector outlook.

The Wall Street firm argues that the operating backdrop remains unusually favourable, with solid GDP growth, low volatility and stable European Central Bank (ECB) policy rates providing a foundation for steady loan growth and benign asset quality.

“We enter 2026 with a continued and reconfirmed positive view on European banks operating in a ’perfect’ environment,” supported by two key drivers, JPMorgan analysts led by Kian Abouhossein said.

These include a solid macro backdrop of improving GDP growth alongside stable rates, inflation and unemployment, and continued bottom-up strength reflected in expected 5.5% annual pre-provision profit growth and 9.7% earnings growth through 2027, supported by share buybacks.

Valuations are also central to JPMorgan’s bullish call. The sector trades on 8.9 times 2027 earnings, which the analysts see as attractive given forecast returns on tangible equity (RoTE) of 16.2% that imply a cost of equity near 11%. The analysts expect this to fall toward 10% in 2026, creating “at least 12% upside over the next year.”

Over the long term, JPMorgan argues the discount to the broader market should narrow further as fundamentals strengthen.

JPMorgan also notes that banks are generating positive operating leverage, keeping cost growth to 1.7% annually versus revenue growth of 3.6%.

Moreover, capital buffers remain strong, with the sector able to absorb an estimated 268 basis points of provisions before profits turn negative. Total shareholder payouts are projected to remain near 8% a year, combining dividends and buybacks.

The bank’s preferred names continue to lean on valuation and capital strength. JPMorgan maintains a bottom-up approach, keeping Barclays, NatWest, Deutsche Bank and Société Générale on its Top Picks list while adding Caixabank, Standard Chartered and Erste.

Analysts said they “continue with our preference for European banks over U.S. banks,” even after Europe’s Stoxx 600 Banks index has outperformed the U.S. KBW Nasdaq Bank Index by 40% year-to-date.

The team argues that the two-year forward price-to-earnings discount of 17% versus U.S. banks “is too high,” noting that this is more in line with lower-quality U.S. regional lenders, while large U.S. money-center banks trade near 11.7 times 2027 earnings.

Potential risks remain, including lower-than-expected interest rates, political uncertainty in France, and increasing competition for deposits.