JP Morgan thinks European banks have more room to run.
The US research house reckons investors are still demanding too high a return to hold the sector, known in the jargon as the cost of equity.
That stands at about 11.5% now but could fall closer to 10% next year, which on its numbers, equates to roughly 15% share price upside. Stretch the horizon further and the cost of equity could drop to 9%, leaving as much as 25% still to play for.
The ingredients are familiar. Banks in the Stoxx Europe 600 index still trade at a steep discount to other sectors, about a third lower on forward earnings.
Their capital is solid, with an average common equity tier one ratio, the core regulatory measure, above 14%.
JPM calculates that the sector could swallow more than two and a half percentage points of bad loan provisions before profits were wiped out. And it expects operating profits before loan losses to grow about 5% a year between 2025 and 2027.
The other charge levelled at banks late in the credit cycle is that they often lose discipline. This time, says the broker, management teams are keeping loan growth sensible, holding down costs and favouring buybacks over splashy acquisitions.
Put those together and it sees the sector’s valuation multiples (just 8.6 times earnings and 1.3 times tangible book value, with returns on equity heading for 15.5% in 2027) with scope to move higher.
As for interest rates, the European Central Bank’s expected cuts should be manageable. Net interest income, the gap between what banks pay depositors and earn on loans, is seen bottoming out in the second half of 2025.
That supports JP Morgan’s swing back towards Europe over the US, after a period in which Wall Street banks pulled ahead.