European bank shares have already had a standout year. Now investors think the run may have further to go, with artificial intelligence emerging as an unexpected tailwind for an industry long seen as slow, regulated, and mature.
From rate fears to renewed confidence in the sector
At the start of 2025, sentiment around European banks was cautious at best. Talk of recession lingered. Rate cuts from the European Central Bank loomed. Many expected profits to soften.
That mood didn’t last.
As economic data held up and worst-case scenarios failed to show, investors shifted position. Earnings stayed strong. Balance sheets looked healthier than expected. Share prices followed.
One short sentence says a lot.
The fear premium faded.
By December, European bank stocks were among the best-performing assets on the continent. An index tracking the sector climbed more than 60% this year, adding to a 25% gain in 2024 and leaving the broader European market far behind.
Societe Generale shares surged around 140%. Commerzbank jumped roughly 125%. Barclays gained close to 70%. Those numbers forced even skeptical investors to take another look.
Why AI entered the picture for lenders
Artificial intelligence wasn’t always part of the European bank story. For years, the AI spotlight stayed on big US tech firms and flashy software names.
Europe didn’t have many of those.
That gap pushed investors to search elsewhere for exposure. Old-economy sectors, banks included, suddenly looked interesting. Not because they would sell AI products, but because they could use AI to spend less.
That distinction matters.
“A lot of the AI story has been focused on revenue winners,” BlackRock’s Helen Jewell said recently. “But there’s also a beneficiary from the cost winners.”
Banks fall squarely into that category.
Lenders across Europe are using AI to tighten fraud detection, automate routine tasks, and reduce staffing needs in back-office roles. None of this grabs headlines like a new chatbot, but it adds up quietly.
One sentence fits here.
Saving money can be as powerful as making it.
Cost control becomes the real AI prize
Analysts increasingly frame AI’s impact on banks through expenses, not sales.
Goldman Sachs expects costs at European banks to grow at only about 1% a year between 2025 and 2027. That’s a sharp contrast to past cycles, when expenses often ballooned alongside revenue.
Efficiency ratios tell a similar story. Goldman forecasts cost-to-income ratios improving by roughly 130 basis points year on year, meaning banks are expected to generate more income per euro spent.
A single paragraph belongs here.
Margins widen when costs behave.
Consulting firm McKinsey estimated last year that AI could bring the global banking industry up to $340 billion annually in added value, with operational costs falling by as much as 20%. Even partial delivery of that promise would reshape profit profiles.
UBS told clients that AI could lift near-term valuations and longer-term earnings, even if the full savings take time to arrive.
Valuations still look cheap by global standards
Despite the rally, many investors argue European banks remain attractively priced.
On average, bank shares in Europe trade around 1.17 times price-to-book value. That’s about 40% below their 2007 peak and well under the roughly 1.7 times seen among US banking peers, based on LSEG data.
Here’s a simple snapshot of how investors see the gap:
| Metric | European banks | US banks |
|---|---|---|
| Price-to-book | ~1.17x | ~1.7x |
| 2025 sector gain | 60%+ | Lower |
| Dividend focus | High | Moderate |
One short line stands alone.
Cheap doesn’t mean unloved anymore.
That valuation cushion helps explain why money keeps flowing in, even after a strong run.
Earnings expectations move sharply higher
The optimism isn’t just about multiples. Forecasts are changing.
According to IBES data, analysts raised their net revisions for European banks last month by the largest margin since May 2023. Twelve-month forward earnings growth expectations jumped to their highest level since that year.
Credit growth is helping too.
ECB data show lending to euro zone businesses running near its strongest pace since mid-2023. In October, corporate loan growth held at 2.9%, just shy of August’s peak. Household lending accelerated to a 2.8% pace, a two-and-a-half-year high.
One sentence captures the mood.
Banks are lending again, and it shows.
Shareholder payouts add to the appeal
Beyond earnings and efficiency, investors are focused on cash returns.
BlackRock expects European banks to return between 20% and 25% of their market value to shareholders over the next three years through dividends and buybacks. For income-focused investors, that matters a lot.
Equita’s Domenico Ghilotti argues that valuation plus payouts still make the sector compelling, even after the rally. He also points to consolidation as another potential boost.
This year’s takeover of Mediobanca by state-backed Monte dei Paschi di Siena reshaped Italy’s banking scene. More deals could follow as stronger balance sheets meet strategic pressure.
Risks haven’t disappeared, despite the enthusiasm
The optimism comes with warnings attached.
Global institutions including the International Monetary Fund and the Bank of England have cautioned against AI-driven exuberance, drawing parallels to past tech bubbles. If expectations race too far ahead of reality, corrections can be sharp.
AI isn’t the only concern.
The ECB recently said euro zone banks face “unprecedentedly high” shock risks. Geopolitical tensions. Trade policy shifts. Climate-related disruptions. Even a potential dollar squeeze for banks exposed to US currency swings.
Yet investors appear willing to look past those risks for now, encouraged by resilience in Europe’s economy and the sense that even lower rates may not derail bank profits.
Old economy, new momentum
What’s striking about this rally is where it’s coming from.
European banks aren’t being reimagined as tech companies. They’re being rewarded for doing what they’ve always done, just more efficiently, with fewer people and better tools.
AI, in this story, isn’t flashy. It’s practical.
As BlackRock’s Jewell put it, economic resilience in Europe could support banks even through further rate cuts. Add improving efficiency and rising payouts, and the case strengthens.
One final short paragraph before closing.
Old industries don’t need reinvention to surprise markets.
For European banks, the mix of steady earnings, controlled costs, and selective use of AI has turned a once-dismissed sector into one of the market’s most closely watched stories heading into 2026.
