Important points
Europe’s banking sector boomed in 2025, with lenders posting their best annual performance since 1997. After a strong third-quarter earnings season, banks will need to decide how and where to utilize their “significant” surplus capital in 2026. Strategists believe the sector will become a powerful diversification strategy for investors in 2026.
European banks are aiming for their strongest year since 1997, with the Stoxx 600 banking index up nearly 60% since the start of the year. The region’s financial institutions enjoyed a strong earnings season, with HSBC and UBS posting higher profits in the third quarter, and valuations for some institutions including Commerzbank and Société Générale more than doubling in the past 12 months. All this caps off what Benjamin Goy, head of European financial research at Deutsche Bank, called a “great year” for the sector. “European banks are well-capitalized. Most or all of them are in the area of significant overcapitalization,” Goy told CNBC. .SX7P Year-to-date Mountain Stoxx 600 European Bank Index. But as financial institutions look to maintain momentum through 2026, the big question weighing on executives now is what to do with this excess capital. While opportunities for organic growth improve, the bank is now “very profitable and could do more,” Goy said. Share buybacks and capital dividends are frequently used and carry low execution risk. But next year, the focus is expected to shift to another option: inorganic growth, or M&A activity, which will allow banks to diversify their revenue streams and enhance growth. “That’s something this industry has been missing for almost a decade,” Goy said. “Confidence is returning among management teams. Investor support is increasing, and announced deals are typically profitable, so even the acquirer’s stock price tends to rise. We expect more of this to happen. ” Goi told CNBC’s “Europe Early Edition” on December 9 that both Italy and the UK are integration hotspots, with activity dominated by domestic “bolt-on” deals with “low execution risks and strong synergies.” [and where it’s] Some of this year’s top German candidates are expected to be involved in such activities, including Monte dei Paschi, Erste Group, Bank of Ireland and Barclays. Competition for so-called “product factories” such as asset management and insurance is likely to be especially intense in the M&A field, but cross-border activities remain difficult due to increased execution risk, typically lower synergies, and political factors. Investment strategists also pointed to strong loan and deposit growth, which is expected to further support the sector’s resilience in 2026, he added. RBC BlueBay Asset Management said cyclical sectors, including financials, have been profitable this year, with a growing trend among global investors to diversify their equity exposure. Sharon Bell, senior European equities strategist at Goldman Sachs, said European banks were now in a “fairly consensus trade” but added that steeper yield curves and further economic growth globally would still provide “a good environment for banks.” We’re talking about where to diversify from expensive, concentrated markets like the U.S., and from that perspective there’s probably no better bank to diversify than a European bank,” Bell said on CNBC’s “Squawk Box Europe” on Dec. 11. Deutsche Bank’s Goy said that increases in net interest and fee income are key revenue drivers supporting the bank’s growth into 2026. He said Europeans were becoming accustomed to investing in capital markets and were a “very healthy driver of fee income growth”. “Net interest income remains the most important source of income for the sector,” Goy said, which will help offset the lower interest rate environment as the European Central Bank keeps interest rates on hold. “There are also interest rate cuts from the ECB and other central banks.” [brought] A little headwind. Net interest income decreased slightly in 2025. But now, with most central banks suspending trading and margins stabilizing, this volume growth is coming back to fruition…this is a major turning point. ”
