European banks are quietly defying the doubters and Citi believes the run isn't over yet, with HSBC Holdings PLC and NatWest Group PLC its top picks.
The sector is up 4% in the year to date, "climbing a wall of worry" that includes ECB rate cuts, tariff uncertainty, and geopolitical concerns.
Valuations are no longer the bargain they once were, but are far from stretched, with capital returns an added attraction.
"Capital return yields, at circa 7%, are still among the highest of any sector globally.
"Arguably even more important is that the sector continues to enjoy consensus EPS upgrades, now up +4% YTD, in sharp contrast to most other European sectors which are still suffering from downgrades."
Recent fourth-quarter 2025 results drove the point home, with 61% of banks beating earnings expectations against a broader European market hit rate of just 49%.
Citi remained cautious on some European names, specifically Deutsche Bank, Svenska Handelsbanken and Unicaja.