Street Calls of the Week
Investing.com -- Goldman Sachs downgraded euro investment-grade banks to “underweight” from “neutral,” saying the sector’s relative value has eroded and fiscal risks in France continue to weigh on performance.
The brokerage said the euro investment-grade banking sector has been trading tighter than the rest of the EUR IG index in recent months, leaving “limited value in keeping a neutral allocation.”
Goldman Sachs noted that the sector’s spread premium, once a key attraction for investors, “is decidedly a thing of the past.”
In a carry-driven market, where returns are largely dependent on yield differentials, that narrowing leaves banks less appealing compared with other corporate issuers.
The downgrade follows several months of stronger bank spread performance. Data from iBoxx and Goldman Sachs show euro investment-grade bank spreads have outperformed non-banks by as much as 70 basis points since early 2023.
Beyond valuations, Goldman Sachs cited sovereign fiscal pressures, especially in France, as a key downside factor.
According to the firm’s variance decomposition analysis, French bank spreads explain roughly 30% of the weekly variation in the overall EUR IG bank index.
This sensitivity tends to increase during periods of market stress, unlike spillovers from French corporate non-bank spreads, which typically weaken in such times.
The brokerage added that the valuation gap between French issuers and the rest of the EUR IG market remains “significant.”
Exhibit data showed the spread ratio for French financial issuers fluctuating below 1.0 for most of 2025, indicating persistent underperformance against the broader index.
Goldman Sachs said this reflects ongoing investor caution amid a “fluid political backdrop and challenging fiscal outlook” in France.
With spreads compressed and sovereign risk elevated, Goldman Sachs recommended investors shift to an “underweight” allocation in euro banks compared with the broader credit index.