BBVA's main takeaways for 2026:
-
European Banks are well positioned to consolidate current record profit levels: the sector is projected to post a 8.7% profit-before-tax expansion next year, led by top line revenues (+7.8%) and spearheaded by Central European (e.+18% YoY) and UK (e.+16% YoY) lenders, while peripheral banks will maintain well supported profits (e.+4% to +10%) after having multiplied their capital generation capacity 2.4x in the last 5 years. On the other hand, Nordic banks (e.-3%) are projected to continue to face widespread interest margin and cost pressures.
-
Asset quality-wise European banks will face 2026 from a position of strength: Despite increased economic uncertainty, consensus macroeconomic projections still point towards a no-landing scenario in Europe, where GDP is expected to expand +1.4%, unemployment levels to remain stable at 6.6% and no inflation uptick (2.0%). In terms of specific exposures to sectors linked to current late-cycle concerns, banks' exposures to NBFIs (main providers of private credit) remains limited at 2.2% of their total assets, while mark-to-market sovereign bond exposures (including OATs) also being minimal enough (2.7% of TAs) to likely not offset the sector's positive sensitivity to interest rates.
-
Supply pressures will ease as banks focus on optimising funding structures: As European banks have undergone their regulatory MREL buildups, TLTRO III repayments and face pressures to keep RWA growth at minimal levels, we expect funding to focus on replacing current outstanding MREL instruments, which translates into a net negative issuance expectation of -€33bn in 2026 (vs +€48bn in 2025) a level that, even though we expect to be more moderate given continued UK bank TFSME repayments (£41.9bn still outstanding), remains a strong technical supporting the sector in a year that will likely face ample supply needs from non-financial peers amid increased capex.
-
Despite current valuations offer limited entry points, expected returns will give cautious investors little options away from subordination & duration in 2026: Given the mix of both: 1) risk-on triggers, mainly the supportive fundamentals backdrop and increased bond scarcity and 2) compressed valuations, with European bank credit spread differentiation being at historic lows (under the 10th percentile of the last decade between asset classes and at historic lows across single names); we expect investor alpha-seeking strategies positioning to mainly revolve around subordination and/or longer tenors with the main return targets to beat being 3.75% in an all-in-yield basis and 131bp in an excess return basis.
-
Our recommended approach to capture alpha in 2026: Even though current valuations offer protection against 2/3rds of historic performances, cognisant of the market volatility stemming from the current economic uncertainty, which we expect to remain largely present in 2026, our preferred approach entering the year is to adopt a conservative investing profile: OW senior bonds (preferably with single name differentiation) and shorter-term (<5yr) subordinated Tier2/AT1 instruments. As such, and being supported by our positive view on the sector, we recommend to delegate most of the alpha/risk-on trades to episodes of market decompression.