Market sentiment vs. valuation reality: the momentum continues, but the tune changes. As we correctly anticipated last year, investors sang ‘Money, Money, Money’ all the way to the bank. While recent price action reflects a 'Don't Stop Me Now' momentum, the investment landscape has fundamentally evolved. Following an outstanding 2025 for European banks (c.53% outperformance vs. STOXX 600) the paradigm has shifted from deep undervaluation to fair value.
The spectacular re-rating has pushed valuations to a normalised 10x 1Y forward P/E, effectively closing the historic discount versus the STOXX 600 – currently the lowest since 2018. The ‘easy money’ of multiple expansion is largely behind us, and with the valuation safety net largely gone, the sector is now more sensitive to any disappointment or external noise.
Consequently, investors must transition from a broad "buy the sector" approach to a highly selective strategy. We would wait for healthy corrections to add exposure on an aggregate basis. We see the most attractive risk-reward in banks with exposure to EMs – supported by our Overweight stance on EM Equities, as recently described in our Equity Views 2026 outlook – and Central Europe, where superior macro dynamics and loan growth offer a clear differentiation. Additionally, we favour diversified franchises poised to capture the rebound in fee income from a recovery in IB business.