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The Latest European Banking Trends To Note
The European banking sector is showing as fairly valued to expensive, with valuations leaving little room for upside.
Key Takeaways
Valuations across the sector have extended further, leaving limited opportunity for investors as interest rate tailwinds begin to fade.
While the European Central Bank (ECB) concludes its rate-cut cycle, the Bank of England (BoE) is expected to accelerate cuts, creating diverging paths for interest rates.
Structural hedges will remain a tailwind for net interest income into 2026, helping to support margins.
- Investment banking income remains volatile, though fixed income and debt capital markets are performing well.
Please note that data may shift between report updates. Please visit Morningstar.com for the most recent data as well as breaking news content.
Navigating the European banking landscape as we close out 2025 takes dedication. While the sector generally looks healthy, the easy wins may be behind us. As valuations stretch and economic conditions shift, understanding the nuances of income streams and capital efficiency becomes paramount for investors.
Our latest "European Banks Industry Pulse" report dives deep into these dynamics. It offers a comprehensive analysis of valuations, the shifting interest rate environment, and the structural factors supporting bank profitability. To read the full research report, download a copy.
Here are the latest five European banking trends as we head into 2026.
1. Current Valuation Levels Leave Little Opportunity
Valuations have extended further since our last Industry Pulse, with the sector now widely ranging from fairly valued to expensive. We think current valuations leave little upside opportunity across the sector as interest rate tailwinds are starting to wane and focus shifts to operating and capital efficiency as well as competitive pressures.
Source: PitchBook. Data as of Nov. 19, 2025.
The market seems to have priced in much of the good news regarding interest rates. Now, the narrative is changing. Upside potential relies heavily on an improved economic growth outlook that drives corporate loan demand while keeping credit costs low. Conversely, the downside risks are becoming more visible: increased competition as banks fight for market share, potentially looser underwriting conditions, and rising credit costs that could eat into capital distributions.
2. Net Interest Income: Structural Hedge to Remain a Tailwind Into 2026
Interest rate paths are starting to diverge, adding a layer of complexity to net interest income forecasts. The European Central Bank looks to have concluded its rate-cut cycle, providing some stability, while the Bank of England is expected to move additional cuts forward.
Despite these shifts, current interest rate levels remain positive for European banks. A key factor supporting this is the structural hedge. These hedges are still rolling onto higher rates through 2026, meaning banks can continue to reprice their assets at beneficial levels even as headline rates stabilize or dip. This dynamic acts as a significant tailwind for net interest income margins across both EU and UK coverage.
When looking at lending specifically, the picture is mixed but generally resilient. In the Euro area, mortgage demand is growing, albeit slowing, while corporate loan demand remains muted. In the UK, mortgage demand has held up better than expected, and banks are lowering hurdles to secured credit as demand expectations dwindle.
3. Trading and Investment Banking Income: Volatile Revenue Streams Still Drive Investment Banking
Revenue from trading and investment banking remains a volatile yet critical component of the sector's performance. European banks continue to rely on these fluctuating streams to drive their investment banking businesses.
Fixed Income, Currencies, and Commodities (FICC) revenue is still growing, providing a solid foundation. Equity sales and trading revenue are not far behind, showing that market activity remains robust enough to generate fees. However, advisory revenues present a mixed bag. While Debt Capital Markets (DCM) volume has been positive, other areas like M&A and Equity Capital Markets (ECM) have seen varied performance. This divergence underscores the importance of a diversified investment banking model in the current climate.
Source: Company reports. Data as of Nov. 19, 2025. Values in brackets represent revenue growth last quarter year over year. M&A=merger and acquisition, ECM=equity capital market, FICC=fixed income
4. Credit Risks: Smooth Sailing in European Credit
If there is one area where the outlook remains notably calm, it is credit risk. Risk indicators across Europe are currently neutral or improving, painting a picture of stability despite broader economic uncertainties.
Employment figures are a cornerstone of this stability. Unemployment rates across major European economies remain stable, which is a strong leading indicator for household loan performance. Additionally, high-yield corporate credit spreads are coming down, suggesting that the market views default risks as manageable. While we continue to view corporate loan books as slightly more vulnerable than household loans, the overall signal is one of "smooth sailing."
5. Capital and Liquidity: Banks Are Well Capitalized
The foundational health of the sector appears to be robust. Liquidity risk indicators in the European banking sector display an overall calm sentiment. Interbank risk shows no signs of distress, and European sovereign risk continues to narrow, reflecting better-than-expected economic developments and anticipated support from lower interest rates.
Crucially, European banks are well capitalized. Common Equity Tier 1 (CET1) ratios comfortably exceed regulatory minimum requirements and management targets across the board. This capital buffer provides a substantial safety net, allowing banks to navigate potential volatility while continuing to support lending to the real economy.
Source: Macrobond, The European Money Markets Institute. Data as of Nov. 21, 2025.
Empowering Smart Decisions in European Banking
The European banking sector is entering a phase where the "easy money" from rising rates is largely in the rearview mirror. Valuations are full, and the focus must now shift to operational efficiency and prudent capital management. However, the sector remains fundamentally sound, with strong capital bases and manageable credit risks.
For financial advisors and asset managers, the challenge lies in identifying the specific banks that can leverage structural hedges and investment banking capabilities to outperform a fairly valued sector. Armed with deep data and forward-looking analysis, you can help clients navigate this nuanced landscape.
Discover the power of precise data with Morningstar. Our platforms provide a deep dive into the European banking sector, offering valuable insights, thorough research, and the reliable market data you need. Whether you are tracking interest rate sensitivity or analyzing credit spreads, Morningstar empowers you to make informed decisions.