Analysts are shouting "continue to rise"! The financial earnings season is providing the latest momentum, European bank stocks are gathering strength to challenge the next peak.

The best-performing sectors in European stock markets continue to maintain strong growth momentum. Investors expect the latest financial reports from major European banks to remain strong. Bulls believe that favorable interest rates, accelerated loan growth, solid asset quality, and active trading activities should boost bank performance. Additionally, European bank stocks are still cheap, trading at a discount of about 30% compared to the market. Andrew Stimpson, Head of European Bank Research at KBW, said: "The European banking industry is expected to have another fruitful year of growth. The current development environment for banks is close to perfect." Deutsche Bank Aktiengesellschaft (DB.US) will announce its performance on Thursday, becoming the first major European bank to report fourth-quarter earnings. Analysts at Morgan Stanley expect its profitability to improve and plan to repurchase 1 billion worth of shares. Both Morgan Stanley and JPMorgan have raised their target stock price for this German bank to 40 this month, the highest level on Wall Street. Given the record $134 billion in trading revenue reported by the top five banks in the US and the surge in M&A activity, investment banking activities should be a significant advantage for European banks. Therefore, research suggests that UBS Group AG (UBS.US) and Barclays (BCS.US) are likely to exceed analysts' expectations for their trading businesses, as both their equities and fixed income businesses have shown robust performance. Loan businesses are also picking up. The strengthening momentum in net interest income should drive loan profit growth for Intesa Sanpaolo SpA in Italy and Lloyds Banking Group plc Sponsored ADR in the UK, with the latter expected to double its pre-tax profits in the fourth quarter. With the robust growth of the domestic economy in Spain, CaixaBank could even raise its net interest income target. Strong profits and robust shareholder dividends have driven the strong rise in European bank stocks, with European bank stocks posting a return of up to 77% last year (including reinvested dividends), outperforming the STOXX Europe 600 Index for the fifth consecutive year. At the beginning of 2026, the European bank stock index rose by 5%, reaching its highest level since the 2008 financial crisis. Companies like Banco Santander S.A. Sponsored ADR, French Industrial Bank, and Commerzbank in Germany all achieved their best performances in 2025, with gains of over 100%. However, the road ahead is not without challenges, as political tensions and uncertainty in domestic policies in various European countries have slightly dampened the previously optimistic outlook. The market-implied cost of equity for BNP Paribas and Credit Agricole in France is 13%, higher than the industry median of less than 10%, indicating higher risks, reflecting France's ongoing fiscal and political turmoil. Emmanuel Cau, Barclays PLC Sponsored ADR equity strategist, said: "The budget deadlock in France and weak fiscal dynamics in the UK exacerbate potential tax-related uncertainties, while bond market observers remain cautious." Business in the US also presents another challenge - given Barclays PLC Sponsored ADR's significant consumer business in the US, President Trump's restrictions on credit card rates will have the greatest impact. However, Cau said that despite the challenges and high hurdles faced by banks after years of outstanding performance, there is still room for growth, therefore he recommends holding bank stocks. Strong profitability and lower external shock risks will bring higher returns to shareholders. Analyst Tarik El Mejjad of Bank of America Corp predicts that with investors increasingly leaning towards high dividends instead of stock buybacks, the industry's total return in 2026-2027 is expected to reach around 16%. Analysts point out that rising interest rates, recovering loan growth, and a rebound in global trade will support revenue growth, while risk costs remain moderate. It is expected that the industry's return on equity will exceed 13% this year and reach 14% in 2027.