Street Calls of the Week
Investing.com -- RBC Capital Markets expects global banks to extend their run of outperformance over the next 18 months, backed by favorable macro conditions, softer regulation, and a positive outlook on interest rates.
"Further profitability improvements, strong capital levels and the return of excess capital should lead to robust shareholder returns," RBC analysts said in a Thursday note, while flagging “political risk and stagflation” as the main threats.
Valuation multiples remain strongly linked to profitability, with RBC noting that “valuation premiums are still heavily correlated to returns (R² 0.81),” meaning roughly 81% of the variation in bank valuations can be explained by their return on tangible equity (ROTE).
Against that backdrop, the bank sees scope for further strength if global growth holds.
Canadian lenders remain the most discounted group. RBC said they could see a re-rating “if earnings momentum inflects.” Bank of Montreal (TSX:BMO) is working to rebuild return on equity above 15%, CIBC is executing well, and provisions for credit losses have likely peaked.
EQB trades at what RBC views as significantly below appropriate levels for a growth bank, while Bank of Nova Scotia offers one of the steepest valuation discounts with strong expected ROE improvement and earnings growth in 2026.
European banks have re-rated on earnings upgrades, yet RBC stressed that valuations are less stretched when viewed relative to the implied cost of equity and price-to-earnings multiples.
That leaves potential for upside if shares return to levels seen under similar conditions. Still, the analysts warned that “geopolitical and macro clouds remain on the horizon” and could weigh on sentiment after a strong run.
"Our preferred stocks remain a combination of implied upside to our price targets and company specific levers to improve profitability," analysts said, highlighting ABN AMRO Group (AS:ABNd), BBVA (BME:BBVA), Bankinter (BME:BKT), Deutsche Bank (ETR:DBKGn), and UBS Group (NYSE:UBS).
U.K. and Irish banks continue to trade about 30% cheaper than global peers, reflecting lower equity risk premiums. Despite already exceeding historic averages on book value measures, consensus sees total return yields in the region outpacing those in North America and Europe.
The analysts said they see “significant medium-term opportunity” and would buy dips later in the year. They highlighted OSB Group (LON:OSBO), Barclays (LON:BARC), Lloyds Banking Group (LON:LLOY), and Metro Bank PLC (LON:MTRO).
In the U.S., the sector is positioned to benefit most from expected monetary easing. RBC said Bank of America, Huntington, U.S. Bancorp and Wells Fargo are well placed to lead gains.
Each brings a distinct catalyst—low valuations at Bank of America, growth prospects at Huntington, improved sentiment at U.S. Bancorp, and regulatory relief at Wells Fargo, with asset cap removal also boosting performance.
The analysts added that regulatory relief more broadly should drive higher returns of capital across the group.
So far this year, bank stocks have outpaced broader markets by a wide margin, rising 20% in the U.S., 42% in Europe and 21% in Canada, compared with gains of 11%, 9% and 17% respectively for the benchmarks.