Citi has warned that European bank profitability has likely peaked as rising costs and falling income from loans begin to bite.
Analysts for the US group expect a slight drop in profits for the sector in 2025, as net interest income (a key source of earnings for banks) declines amid stabilising interest rates.
Banks may increasingly rely on fees and other income streams to maintain profitability.
The report highlights that despite these challenges, some banks remain attractive to investors.
HSBC Holdings PLC (LSE:HSBA) and NatWest Group PLC (LSE:NWG), two major UK lenders, are among Citi’s top picks.
Both are noted for their strong returns on tangible equity (a measure of profitability that excludes intangible assets) hovering in the mid-to-high teens.
Citi values HSBC at 890p a share, citing its robust dividend prospects and global presence. NatWest is valued at 535p a share, reflecting its domestic focus and restructuring progress.
Citi also noted that European banks are maintaining strong balance sheets, with capital buffers well above regulatory requirements.
This financial strength underpins plans for higher dividend payouts and share buybacks, it adds.
Shares in both HSBC and NatWest were rangebound in afternoon trading.