European banks are set to continue outperforming in 2026, supported by resilient macro conditions, strong internal capital generation and further valuation tailwinds, according to JPMorgan’s latest outlook on the sector.
The bank argues that lenders are operating in an unusually supportive environment, marked by firm GDP growth, subdued market volatility and a steady rate path from the European Central Bank — all of which underpin stable lending activity and healthy 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.
Those drivers include an encouraging economic backdrop — improving GDP growth paired with stable rates, inflation and unemployment — and persistent bottom-up strength. JPMorgan expects pre-provision operating profits to rise 5.5% annually and earnings to grow 9.7% through 2027, helped by sustained share buybacks.
Valuation remains a central pillar of the bullish thesis. The sector trades at 8.9x expected 2027 earnings, a level the analysts consider compelling relative to projected 16.2% returns on tangible equity, which imply a cost of equity around 11%. They anticipate this falling toward 10% in 2026, creating “at least 12% upside over the next year.”
Over the medium term, JPMorgan expects the sector’s discount to the broader equity market to narrow further as fundamentals improve.
The note also highlights that banks are delivering positive operating leverage, keeping cost growth to 1.7% per year compared with 3.6% revenue growth. Capital buffers remain robust, with capacity to absorb roughly 268 basis points of provisions before profitability turns negative. Annual shareholder payouts — combining dividends and buybacks — are projected to stay near 8%.
In terms of stock selection, JPMorgan continues to prioritise valuation strength and capital resilience. Its Top Picks list still includes Barclays (LSE:BARC), NatWest (LSE:NWG), Deutsche Bank (TG:DBK) and Société Générale (EU:GLE), with Caixabank (TG:48CA), Standard Chartered (LSE:STAN) and Erste (TG:EBO) newly added to the preferred group.
Analysts said they “continue with our preference for European banks over U.S. banks,” even after Europe’s Stoxx 600 Banks Index has beaten the U.S. KBW Nasdaq Bank Index by 40% so far this year.
They argue that the current 17% two-year forward P/E discount relative to U.S. banks “is too high,” noting that such a gap is more typical of lower-quality U.S. regional lenders, while America’s largest money-center banks trade closer to 11.7x 2027 earnings.
Key risks cited include potential downside surprises on interest rates, political uncertainty in France, and intensifying competition for deposits.
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