UBS has reiterated its positive stance on the sector going into 2026 and kept Barclays PLC (LSE:BARC) on its list of top buy-rated names, arguing that the backdrop for banks remains supportive and that the market is still underestimating the potential uplift from artificial intelligence.
The broker said 2025 had been “strong” for European banks, with earnings upgraded 10%, dividends and buybacks lifting the yield to 9% and valuations re-rating by more than two price-to-earnings points.
Even after that, UBS thinks the sector remains attractively priced at about 8.8 times expected 2027 earnings, a 35% discount to the wider market. It expects banks to grow earnings 8–9% in 2025 and 2026 and 11% in 2027.
The note argues that 2026 could be the year when investors “make up their mind” on AI’s potential in financial services.
UBS pointed to early signs of change in how advisory and professional firms are hiring and said more complete digitalisation could eventually reduce bank costs by 15–20%, which on its numbers, implies roughly 20% more pre-tax profit.
It expects this theme to become increasingly important as the market debates how much of that upside to price in.
Within the UK, Barclays remains a preferred name. UBS highlighted the bank’s progress against its existing plan, its strengthening returns and what it sees as a compelling earnings growth profile through 2027.
Standard Chartered has been removed from the top picks roster after a strong run, though it remains rated buy.
The broker also said merger-and-acquisition activity could provide further optionality. Banks continued to sell non-core assets in 2025 and buy scale in areas such as digital banking and savings, while strong capital generation is giving management teams room to act.
UBS expects M&A to add to earnings in the coming years, support that it does not believe is fully captured in valuations.