Analysis:Old meets new economy: AI boom to supercharge European banks' rally
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LONDON, Dec 15 : After a stellar 2025, investors expect shares in European banks to keep heading higher in 2026, supported by strong earnings and, crucially, cost savings stemming from artificial intelligence.
As fears of a recession and interest rate cuts from the European Central Bank have subsided, investors have turned even more positive towards European banks, revising up their expectations for the sector, despite a complicated backdrop.
Meanwhile, AI has emerged as a new force drawing investors to European lenders' shares, partly because a dearth of technology companies in the region has forced many to hunt for AI beneficiaries in old-economy markets.
Banks have started to use AI to improve operational efficiency and fraud detection, as well as to reduce staff costs.
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"European banks could be a real beneficiary of AI," said Helen Jewell, chief investment officer for fundamental equities at BlackRock, the world's largest asset manager, with about $12 trillion under management.
"A lot of the AI story has been focused on the revenue winners, but we also know that when it comes to AI, there is a beneficiary from the cost winners," she said at a press event.
UBS said in a note to investors they see AI as a key source of potential upside to banks' near-term valuations and longer- term earnings.
But that comes with risks.
Warnings over AI-related exuberance and the risks of a dot-com style bust have come from various sides, including the International Monetary Fund and the Bank of England.
And risks aren't only AI-related.
The ECB said euro zone banks face 'unprecedentedly high' risk of shocks including geopolitical tensions, shifting trade policies, climate-related crises and even a dollar squeeze for banks exposed to the volatile U.S. currency.
Yet investors have snapped up bank stocks in earnest. Societe Generale shares have rallied 140 per cent this year, Commerzbank 125 per cent and those in Barclays rose almost 70 per cent. An index of European bank stocks is up more than 60 per cent, on top of the 25 per cent gain in 2024 and more than four times better than the pan European index.
Investors also view them as relatively cheap, particularly when compared with U.S. banking shares. European bank stocks currently trade around 1.17 times their price-to-book value, some 40 per cent below their 2007 peak and below the 1.7 times of their U.S. rivals, according to LSEG data.
EARNINGS EXPECTATIONS JUMP
In terms of costs, Goldman Sachs said in a note that costs would grow at a compound annual rate of only 1 per cent between 2025 and 2027. The U.S. bank also sees efficiency continuing well into 2026, with banks' cost/income ratios improving by 130 basis points year on year, meaning companies are expected to spend less to generate income.
Consulting firm McKinsey estimated last year that AI could bring the global banking industry as much as $340 billion a year in additional value, with a drop in operational costs of 20 per cent.
Even if AI implementation savings take years to fully emerge, it will be a big enough shift to drive greater expansion in valuations, UBS said.
Last month, analysts raised their net revisions for the sector by the most since May 2023, and 12-month forward earnings growth expectations jumped to the highest since 2023, according to IBES data.
Growth in bank lending to euro zone firms is still running near its highest since mid-2023, according to the most recent ECB data. Credit growth to businesses was unchanged at 2.9 per cent in October - just below August's 3 per cent, the most since May 2023 - compared to the previous month, while loan growth to households accelerated to a 2-1/2-year high of 2.8 per cent from 2.6 per cent.
BlackRock's Jewell expects European banks to return 20-25 per cent of market value to shareholders over the next three years via dividends and share buybacks.
"If you put together valuation and ... the shareholder remuneration, you still have an asset class that is quite attractive," Equita co-head of research Domenico Ghilotti said, adding that merger activity is another driver underpinning the sector.
The takeover of Mediobanca by state-backed Monte dei Paschi di Siena was one of the biggest in the sector this year, transforming Italian banking. Other deals could be on the way.
"What we are seeing is economic resilience within Europe, and that means that even if we do see more rate cuts, that economic resilience... will be good for European banks," BlackRock's Jewell said.
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