European Banks Surge in 2025, Still Undervalued vs US Counterparts
European banks have witnessed a significant rally, with the MSCI Europe Bank Index set to have its best year since 1997. Despite this, they remain undervalued compared to their US counterparts, presenting an attractive investment opportunity.
In 2022, European banks traded at a substantial discount, between 30% to 60% below their book value, compared to US banks. This trend has continued, with the Mag Seven increasing by only 9.9% in the same period. However, the outlook is promising. Banks such as Banco BPM, UniCredit, and Santander are expected to see a renewed recovery in credit volumes by 2026. This is due to their strong growth in fee income, effective cost management, solid capital positions, and loyal, cost-conscious customer bases, particularly Banco BPM's dominant position in Northern Italy.
The rally in European banks is supported by several factors. Credit lending is expected to increase throughout Europe, particularly in Germany, with low tariff risks. Regulators have eased requirements, leading to increasing dividend payouts. Additionally, the normalization of interest rates has boosted net interest margins. Despite the rally, European banks are not overvalued, with reasonable valuations given the expected economic recovery in Europe. This is reflected in their lower P/B and P/E ratios compared to US banks.
European banks have outperformed the Mag Seven and the S&P 500 Index, rising by 63.6% from January to August 2025. While they have seen a significant rally, they remain undervalued compared to US banks. A diversified portfolio can benefit from investing in European banks, even when other sectors struggle, given their expected recovery and attractive valuations.
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