From Morningstar:

European banks have been struggling for many years. Negative or zero interest rates have depressed net interest margins, leading to significant underperformance. However, a recent rebound in interest rates has led to a glimmer of hope, with European banks finally reporting better financial results. Despite recent outperformance, European banks are still underrepresented in European large cap funds, but there is hope for better earnings growth and capital return to shareholders in 2024. According to Morningstar analysts, the sector has potential for continued outperformance if earnings keep growing.

In their Banking Landscape report, Morningstar analysts estimate that European banks can generate a midcycle return on equity of 11% compared to the 8% average it generated over the past decade. Even if valuation multiples are depressed, the banking sector could earn €223 billion in net income this year, compared with €172 billion last year. Digitalization has led to a material reduction in the number of branches and employees of European banks, leading to operational efficiencies and profitability increases. Despite recent rebound, the valuation gap with the European market is far from closed, meaning investors can still find value in the European banking sector for the long run. Among the ten banks with a “Narrow” Economic Moat, two score a Morningstar 5-Star rating and four have a 4-star rating.



Read more: Are European Banks Escaping Their Losing Streak?