This report provides our latest insights of the European banking sector following the Q2 2025 earnings season. In this update we examine the key fundamental developments across the sector, evaluates year-to-date performance by asset class, and outlines our allocation strategy and trade recommendations for the second half of the year.
Key highlights include:
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2Q25 earnings: European banks results showed robust profitability in the sector (avg. PBT 3% above consensus), with the majority of the beat deriving from higher than expected NII (with FR, UK, and DE outperforming) and LLPs. A total of 11 banks under our coverage improved their FY25 guidance, which proves the solid operating momentum. Asset quality remains generally stable or modestly improving across the board, while capital generation from retained earnings was able to mostly offset CRR3/Basel IV impacts.
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Macro backdrop & market view: Following a strong 2024, Financials continued to outperform Non-Financial Corporates (NFCs) in 2025 with the SP/NFCs differential tightening 14bp in the year and 13bp for the SNP/NFCs. We continue to favour an overweight on the sector based on the strong fundamentals and favourable technicals.
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Preferred positioning: Going into year-end, we maintain our overweight for Senior over Subordinated debt on the back of the level of compression achieved YTD. Within AT1s, we maintain a selective approach favouring old vintage, higher reset instruments which we believe could outperform in a wekening market.
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Supply dynamics: At the time of writing, total European bank supply reached €295bn, up 4% YoY versus the same period in 2024. The YtD replacement rate of instruments maturing out of issuers’ MREL stacks stands at 83%. However, this figure masks significant variation across asset classes, where issuance has been skewed toward SNP and AT1.