Lloyds Banking Group PLC (LSE:LLOY) and NatWest Group PLC (LSE:NWG) could be among the biggest winners in the next leg of the European banking sector’s rerating, according to analysts at Keefe, Bruyette & Woods.
Loan growth – running at an annualised 3% in the first half of 2025 – will be central to driving valuations higher in the sector, alongside a steeper yield curve, the broker said.
Both Lloyds and NatWest are highlighted as stocks that not only deliver balance sheet growth above local markets but also have the strong return on tangible equity (RoTE) needed to capture a premium rating.
“Stocks that are delivering loan growth and that stand to gain the most from adding terminal growth include NWG and LLOY,” the broker said.
Despite European banks rallying more than 30% this year, KBW stresses valuations are "not expensive".
Banks are trading at 7.8 times 2027 forecast earnings and a relative P/E of 64%.
"Both of those numbers are towards the top end of where banks have traded over the past five years, but are still below longer term averages (8.5x and 71%).
"More importantly, average P/Es are not ceilings. Periods of bank performance over the past 25 years have all ended with a FY3 P/E >10x and a relative P/E >80%."
That suggests to the analysts as much as 20-25% further upside for the SX7P European banks index.
Risks remain, particularly from higher long bond yields, geopolitics and the risk of renewed bank taxes in the UK.
But KBW maintained an 'overweight' stance and has added NatWest to its top ideas, while Lloyds is among those expected to benefit most if loan momentum holds.