From crisis to comeback: European banks outperform expectations

For more than a decade, the European banking sector was a symbol of stagnation, underperforming its U.S. counterparts. Weighed down by crisis after crisis, it struggled under the burden of negative interest rates. But in a surprising twist, this long-suffering sector has emerged as one of the market’s best-performing ones—even outpacing the much-revered "Magnificent Seven" (Mag 7), comprised of U.S. tech giants Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

Over the past year, European bank stocks have surged, with the representative Euro Stoxx Banks Index rising approximately 52% (measured in USD), compared to the Bloomberg Mag 7 Index’s 40% gain. This rally marks a significant reversal of fortunes for these banks and the European markets in general. It may potentially also herald the start of a long-awaited rebalancing in global markets.

Banks like Intesa Sanpaolo, Credit Agricole, and BNP Paribas have performed exceptionally well, demonstrating the newfound strength of the sector. This performance is underpinned by several factors, including robust earnings growth, healthy balance sheets, and a reversion to fair value.

Figure 1: Total returns for Euro banks compared to 3 major indices

Source: Bloomberg 
All returns in USD and as of February 25, 2025 
* MSCI ACWI ex-US Index

European banks: a long road to recovery

The rise of European banks has been remarkable, considering they have severely underperformed U.S. banks since the Great Financial Crisis (GFC) in 2008-09. While the U.S. regulators moved quickly to stabilize the banking sector, Europe’s path to recovery was long, drawn out, and rife with turbulence because of the multi-faceted nature of regulatory hurdles and political crisis. 

Since the GFC, Europe went from crisis to crisis with both countries and banks on the verge of default. Political upheaval related to Grexit, Brexit, and other such events also stressed the system. To make matters worse, this was compounded with weak domestic growth, while the European Central Bank (ECB) held interest rates in negative territory for nearly seven years. This deprived banks of their ability to generate meaningful net interest income. 

Modern financial systems struggle under prolonged zero or negative interest rates and the European banks bore the brunt of this challenge. With weak GDP growth, they lacked the ability to generate strong net interest income, their primary earnings driver. This prolonged pressure not only weighed on profitability, but also constrained their capacity to absorb and resolve stressed and non-performing loans. Unsurprisingly, the Euro-banking sector faced a long and difficult recovery.

Inflation: a blessing for banks 

Everything changed in 2022 and continues to evolve. Soaring post-pandemic inflation, worsened by the war in Ukraine, and rising government deficits prompted the ECB to aggressively hike interest rates. This finally led to the interest rate environment breaking out of the extended excursion into negative territory, and in turn, became the long-awaited lifeline for European banks. 

With rates back in positive territory, banks could finally return to traditional lending models: charging for loans and paying for deposits. Rising rates expanded net interest margins, directly boosting profitability on a per-loan basis. Even as rates trend lower again amid easing inflation, banks remain in a strong position. The overall rate environment is still positive and GDP growth – while modest – remains positive too. Healthier balance sheets have unlocked operating leverage, allowing earnings to grow faster than revenues. 

Figure 2 highlights this dynamic through the earnings per share of Intesa Sanpaolo. The impact of the interest rates hikes beginning in 2022 is clearly reflected in the 2023 earnings. This is a testament to how critical interest rate policy is in reshaping a sector’s outlook.

Figure 2: Intesa Sanpaolo’s normalized earnings per share (2015-2024) and expected earnings (2025-2027)

Source: FactSet

The market’s expectation for future earnings for 2025-2027 is also shown here, indicating that the market does not expect a detrimental impact from the recent decline in interest rates. 

Valuations and performance: still room to grow?

Despite the recent surge in performance, European banks have traded at a significant discount to their U.S. counterparts for nearly 15 years. Most major U.S. banks have historically traded well above a valuation metric of 1x on Price-to-Book (P/B), while many European banks have traded well below the 1x figure. Even with their strong run, these banks are not overvalued. For example, Intesa now trades at 1.4x P/B, which brings it closer to what we believe is fair value.

If the macroeconomic environment remains stable, European banks—which are now in a much stronger position—should continue to deliver solid earnings. As their stock prices start to reflect these improved fundamentals, investors can also benefit from steady dividends and share buybacks, which enhance shareholder returns. Unlike the uncertain years of negative rates, banks are now operating in a more favourable environment, and these stocks should continue to outperform global markets. 

For long-term investors, this combination of earnings growth, income generation, and capital returns makes European banks an attractive opportunity. 

CWB Wealth Management Ltd. (CWB Wealth) is a wholly-owned subsidiary of National Bank of Canada. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of CWB Wealth Management Ltd. (CWB Wealth) or its affiliates. CWB Wealth does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Information herein is intended to provide qualified or accredited investors, or their advisors, with general information and is not, and under no circumstances is to be construed as, a prospectus or advertisement or a public offering of the securities of pooled funds offered by CWB Wealth. Any such offer or solicitation shall only be made at the time a qualified or accredited investor, in those jurisdictions where permitted by law, receives the Confidential Offering Memorandum, or other offering documents as applicable, relating to the respective pooled fund. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant or other advisor before making any financial decision. Quoted yields should not be construed as an amount an investor would receive from the Fund and are subject to change. Investors should consult their financial advisor before making a decision as to whether mutual funds are a suitable investment for them. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

CWB Wealth uses third parties to provide certain data used to produce this report. We believe the data to be accurate, however, cannot guarantee its accuracy. Visit https://www.cwbwealth.com/disclosures for the full disclaimer.