Citi has named HSBC Holdings PLC (LSE:HSBA) and NatWest Group PLC (LSE:NWG) among its top picks in European banking, arguing that UK lenders could offer better value after missing out on the full force of a sector-wide rally so far in 2025.
European bank shares have soared this year, buoyed by hopes that fiscal stimulus will revive credit demand and capital markets activity.
But Citi says the optimism may be running ahead of reality.
“Sentiment is probably the most positive we have seen in 20 years,” analysts wrote, “albeit we fear any earnings-per-share benefit may be backloaded.”
The US bank expects little net profit growth across the sector in 2025 and warns the recent momentum may stall.
Despite capital return yields remaining attractive, Citi believes investors should now be more selective, focusing on banks with scope for near-term earnings upgrades that have not yet fully re-rated.
That puts UK names in the frame. HSBC and NatWest, alongside Italy’s Intesa Sanpaolo, top Citi’s list of preferred stocks.
Unlike some eurozone banks, which have rallied strongly, these lenders still offer what Citi sees as “attractive yields and upside risk to earnings.”
The broader picture remains mixed.
While bank earnings have been more resilient than feared, the sector no longer screens as especially cheap.
Citi suggests the trade may be shifting from broad exposure to more tactical stock picking - a sign, perhaps, that the exuberance in Europe’s banking sector is starting to come up against fundamental limits.