For a fourth year in a row, European banks are on track to have outperformed the broader regional market — barring a weak December — thanks to solid earnings per share upgrades, Deutsche Bank Research's team of analysts said in a note released on Monday.
European bank stocks have generated a total return of 29% year-to-date, versus nearly 10% from the pan-European STOXX 600 (^STOXX) index, according to data from Deutsche Bank.
The analysts said they expected 2025 to be the first "down year" for net interest income for banks for some time, due to interest rate cuts. Net interest income is a key metric that indicates a bank's financial health, as it measures the difference between how much interest they are earning on loans and other assets versus how they pay out on deposits.
In addition, they said that while profitability "remains very good by post-GFC (global financial crisis) standards...we expect the sector to lose earnings momentum".
"Hence, this is our first outlook in five years in which we are not positive on the overall sector," the analysts added.
In this environment, Deutsche Bank's analysts said that there were being "more selective" with their stock picks and preferred "more diversified banks with material fee income opportunities, exposure to higher growth regions, hedges, significant excess capital and attractive capital returns, as well as m&a (mergers and acquisition) opportunities".
Here are the six stocks they highlighted as top picks.
Deutsche Bank's analysts said their top picks were even more attractively valued that the European banking sector more broadly, including a capital return of around 10.5%.
UK-listed multinational bank Barclays was one of the new additions to Deutsche Bank's list.
The analysts said it was one bank that sizeable revenues outside of its net interest income (nii), including from asset and wealth management, as well as investment banking.
They said that 2025 would be a "pivotal year" for m&a in the sector, with Barclays as one of the banks that had recently closed a deal.
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At the beginning of the month, Barclays announced that it had completed the acquisition of Tesco's (TSCO.L) retail banking business. The bank said it expected the deal to result in an estimated pre-tax profit of around £300m ($377m) in the fourth quarter.
Shares in Barclays are up nearly 71% year-to-date, with the stock soaring to a nine-year high in October when the bank released its third quarter results.
Barclays posted a 23% rise in attributable profits, which is owed to shareholders, to nearly £1.6bn. This beat consensus forecasts of nearly £1.3bn, according to figures provided by the bank.
Total income across the business was up 5% year-on-year to £6.5bn, with the most growth seen in its investment banking division, where income had increased 6% to nearly £2.9bn.
Greece's largest lender by market value, Eurobank, was another new addition to Deutsche Bank's list.
Analysts had a "buy" rating on the stock, saying that the bank was "unleashing growth with under-appreciated m&a potential.
They said it was the only bank in Greece with notable exposure to high-growth profitable international unit, namely in Cyprus and Bulgaria.
On Monday, Eurobank announced that it had entered into an agreement to acquire a further 24.7% stake in Cyprus' Hellenic Bank.
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After the completion of this transaction, this adds to Eurobank's controlling stake in the bank with a total holding of 93.5%.
In its nine-month results, released earlier in November, Eurobank said net interest income had risen 14% year-on-year to €1.8bn (£1.5bn) and that core income had grown nearly 14% to €2.3bn.
Back in June, Eurobank said it had received approval from the European Central Bank to pay its first dividend distribution in 16 years, since before the onset of Greece's financial crisis in late 2009.
Shares in Eurobank plummeted amid the financial crisis, but have been on the rise in recent years, with the stock currently up 113% over five years.
The third new pick on the list is Swiss private bank Julius Baer, with Deutsche Bank's analysts noting that its net inflows had picked up in the second half of the year and believed there was more to come.
They attributed this to the bank's "significant" net hiring, structural growth and market tailwinds.
In its first-half figures, released in July, Julius Baer said assets under management had grown 11% to 474 billion Swiss francs (£424bn), driven partly by net new money inflows. Following a negative start to the year in January, the bank said net new money recovered significantly to total net inflows of 3.7bn Swiss francs, though this was down from 7.1bn Swiss francs for the same period last year.
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A couple of days before the release of these results, Julius Baer announced that it had appointed Goldman Sachs (GS) partner Stefan Bollinger as the bank's new CEO and he was due to take the reins on 9 January.
Former CEO Philipp Rickenbacher left Julius Baer earlier in the year, after the bank wrote down 586m Swiss francs on loans to failed Austrian property group Signa, Reuters reported.
Shares in Julius Baer are currently trading at their highest point since August last year, with the stock up nearly 24% year-to-date.
French bank BNP Paribas was given a "buy" rating by Deutsche Bank's team, who said that it had a "well diversified business mix, [which added] a layer of resilience in any environment.
BNP Paribas' revenue mix ranged across corporate banking, wealth management and personal finance, in addition to leasing and retail in European countries such as France and Italy.
The analysts expected the bank to post positive revenue growth in all segments on a compound annual growth rate basis to 2026.
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They said that the bank also has positive jaws, which refers to when revenue rises faster than expenses, resulting in a bigger profit. In addition, the analysts said the bank had a "steady cost of risk, [which] underpins its positive net income and EPS growth forecast until 2026".
"In this context, we find the current year’s c.30% share price relative underperformance and discounted valuations unjustified," they said.
BNP Paribas' share price is down 10% year-to-date, with the stock declining after its third quarter results at the end of October disappointed investors, despite posted nearly 3% revenue growth to €11.9bn and gross operating income growth of 4% to €4.7bn.
Austrian bank Erste Group made the top picks list, as Deutsche Bank's team said they continued to see structural growth opportunities to further expand its net interest income and fee income in the region.
Erste Group, which operates across central and eastern Europe, posted 3% growth in its net interest income in the third quarter to €5.6bn in all its core markets except Austria. Meanwhile, net fee and commission income was up 11% to €2.2bn.
The bank said that following good business development in the first nine months of the year, it was once again upgrading its financial outlook for 2024. Driven by expected higher net interest income, the bank anticipated that net profitability would grow by more than 2% versus 2023, up from previous estimates of this being flat year-on-year.
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Deutsche Bank Research said that the bank's Czech business stood out, as it benefitted from lower rates on the way down.
The analysts said: "Strong profitability improvements allow for above-sector-average profitability and pave the way for attractive double-digit capital returns."
Erste Group shares are trading at their highest point since 2007 and are up 40% year-to-date.
Deutsche Bank's analysts said that Italy's Banca Monte dei Paschi di Siena (BMPS) was an "m&a prophecy becoming a concrete option".
Last week, the Italian government offloaded its 15% stake in the bank, bringing on board rival Banco BPM (BAMI.MI) as a shareholder, with it having taken a 5% stake.
BMPS, which claims to be the oldest bank in the world, turned to the Italian government in 2017 for a bailout to help cover a capital shortfall. The state gave BMPS €5.4bn in exchange for a 70% stake in the bank.
Deutsche Bank's analysts said: "Despite market skepticism, the evolution of [BMPS's] nii was much in line with peer average."
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The bank reported net interest income of €1.8bn in the third quarter, up nearly 5% on the same period last year.
The analysts said the BMPS's "very strong capital position should remain above average also in the event of an M&A and/or an extraordinary dividend."
They added that the bank has the highest cash dividend yield in their coverage, with a sustainable payout ratio of 75%. A payout ratio refers to the percentage of company earnings that are paid out to shareholders in dividends.
While BMPS shares are still trading nowhere near where they stood before the financial crisis, the stock is up 95% year-to-date.
Deutsche Bank's analysts said 2025 represented a shift for European banks, with these stock picks exposed to key themes for the year, including "broadening revenue momentum organically and via m&a".
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