Are European bank stocks experiencing a renaissance?

Over the past few months, investors have shown a decided interest in anything relating to gold, AI or defence. Another sector is also looking very good, though, and that’s European bank stocks.

The sector already showed signs of rallying last year, and is by far the best-performing sector in Europe this year. The STOXX Europe 600 Banks has been 23% in the black since the beginning of 2025, and the broader STOXX Europe 600 has also been doing quite well, rising by 9% (situation on 4 March 2025).

In particular, Société Générale (+44%), Banco de Sabadell (+39%) and Banco Santander (+38%) have been climbing fast since the beginning of 2025 (situation on 4 March 2025). According to Bloomberg, European bank stocks are having their longest winning streak since 1997. People who bought a STOXX Europe 600 Banks index tracker four years ago have seen this investment more than double in the meantime.

Why European banks are seeing a renaissance

1. Strong company results

In the aftermath of the financial crisis, European banks went through a bad time. They struggled with low and even negative interest rates for a full decade. The outlook for the sector improved significantly once central banks finally began raising interest rates in 2022. Banks have seen profits rise sharply since then, as they passed on the higher interest rates to borrowers much faster than to savers. Several banks even had record earnings in the past two years.

Banks are driving European equities’ rally right now, with good reason. Their results for Q4 2024 exceeded expectations by an average of 10% according to Bloomberg. Over the past quarters, banks showed that even falling key interest rates couldn’t do them much damage.

Investors are also increasingly positive. While certain banks suffered a small dip recently after announcing their results and outlook, investors remained eager to buy. UniCredit and Barclays took only a few days to recover.

2. Buybacks and dividends

Many banks have announced buybacks of their own shares in recent weeks. The aim of these buybacks is to further encourage investor confidence, support share prices and boost corporate earnings. Buying back shares reduces the number of outstanding shares, thereby increasing the earnings per share.

Bloomberg calculated that for STOXX Europe 600 companies in 2024, financials accounted for one-fifth of dividends paid and value creation through buybacks. According to UBS estimates quoted in the Financial Times, European banks (including the UK) will pay EUR 74.4 billion in dividends and spend EUR 49 billion on buybacks in 2025. For example, Banco Santander has already announced buybacks worth EUR 10 billion for 2025 and 2026, Société Générale is planning a share purchase worth EUR 872 million, HSBC intends to buy back USD 2 billion of its own shares in the first quarter of 2025, BNP Paribas is raising USD 1.1 billion for buybacks in 2025, and so on.

Buybacks are not a new phenomenon, but 2025 is set to be a record year. These new buyback programmes and dividend increases follow a period in which investors tended to ignore the sector. Banks had to overcome low valuations and a modest dividend policy, and were even asked to cancel dividends and pause buying programmes after the financial crisis.

3. Wave of acquisitions

The consolidation wave in European banking is giving an additional boost to share prices. A few months ago, for example, BNP Paribas was already taking steps to acquire AXA Investment Managers, and other matches are imminent as well. Consolidation should provide benefits of scale (strongertogether), while also reducing costs.

Southern Europe has been especially active. For example, UniCredit is courting minor rival Banco BPM, currently itself in the process of acquiring Anima Holding. At the same time, UniCredit has also set its sights on Commerzbank in Germany. Banca Monte dei Paschi di Siena has bid on Mediobanca, while BPER Banca is attempting toacquire Banca Popolare di Sondrio. In Spain, BBVA is eyeing Banco de Sabadell.

While the stocks involved in these potential acquisitions are among the year’s strongest performers, they are certainly not the only ones doing well. French bank Société Générale is currently the STOXX Europe 600 Banks index’s best performer, up by 44% this year (situation on 4 March 2025).

4. More attractively priced than US banks

The sector’s recent rally has increased valuations considerably. While European bank stocks remain attractively priced, they are not as cheap as they were. The STOXX Europe 600 Banks index is currently trading at a price-to-earnings ratio of 8, compared to 13.50 for the KBW Bank index, which focuses more on the United States. European banks cost less than US bank stocks and also boast a dividend yield of 5.9%, more than twice the KBW index’s 2.6% yield (situation in February 2025).

The right time to invest?

The European banking sector’s rally opens up opportunities. It makes for an attractive picture, thanks to a combination of strong company results, extensive buybacks and a wave of acquisitions that could lead to cost savings and economies of scale. Relatively favourable valuations compared to US counterparts and a nice dividend yield reinforce this impression.

For investors with a long-term vision and a well-defined risk profile, the sector can offer opportunities. It is important to be aware of the risks as well. Prices rarely follow a straight line. Earnings may have peaked already, and don’t forget the impact of potential rate cuts by the ECB. How the economy develops is also very relevant, as are the effects of any import tariffs.

Before making a decision, you should carefully consider prospects for growth, market volatility and your own finances. Finally, diversification remains essential to ensure a robust portfolio. How to invest in European bank stocks

1. Individual shares

Investors who find specific banks appealing and are willing to actively manage their own portfolio may prefer to invest directly in individual bank shares. The disadvantage is that monitoring the performance of individual shares requires more knowledge and time.

2. Trackers (ETFs)

For those seeking broader exposure to the sector without a preference for specific equities, there are also ETFs (exchange-traded funds) tracking the European banking sector. The advantage of trackers is that they offer a diversified investment across the sector, reducing the impact of individual stock movements.

3. Active fund management

Investors who prefer to have a professional management team make the decisions may opt for actively managed funds with a focus on European banks or the broader financial sector. The good thing about funds is that fund managers will actively respond to market developments and select the best opportunities. Less advantageously, management costs are also generally higher than for trackers.

Whatever approach you choose, diversification and a long-term vision remain crucial elements of a successful investment strategy. Before investing, be sure to read up on financial instruments’ main characteristics and risks.

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