Citi analysts reaffirmed an overweight stance on European banks, highlighting the sector as one of the few still experiencing earnings upgrades. Lloyds was raised to Buy and Deutsche Bank to Neutral/High Risk, supported by improved earnings dynamics and valuation strength following market turbulence tied to the Middle East conflict.
The analysts emphasized that UK domestic banks, particularly Lloyds, have seen the largest EPS forecast increases due to favorable shifts in long-end rates that support reinvestment strategies. Citi’s top picks in the sector include HSBC, NatWest, and Societe Generale, noting that EPS upgrades year-to-date have been most pronounced for HSBC, BNP Paribas, and Santander.
Concerns over the Middle East conflict and the rise of private credit were described as overstated. Citi attributed recent sector volatility to positioning rather than fundamentals and expects earnings upgrades as forward interest rates rise. The bank also flagged artificial intelligence as a medium-term driver, with targeted profit before tax uplift projected at 2–4% over three years.
On cost and loan growth, European banks are aiming for controlled expense growth, mid-single digit loan expansion, and ongoing M&A activity, with notable moves including Santander’s pursuit of Webster and NatWest’s approach for Evelyn Partners. Potential UniCredit-Commerzbank consolidation remains under review amid significant hurdles.
Frequently Asked Questions
Why did Citi upgrade Lloyds and Deutsche Bank?
Improved earnings dynamics and valuation support amid market volatility.
Which banks are Citi’s top picks?
HSBC, NatWest, and Societe Generale.
How did Citi view Middle East conflict and private credit concerns?
As overstated risks; recent volatility reflected positioning, not fundamentals.
What role does AI play in European banks’ outlook?
Projected 2–4% profit before tax uplift over three years.
What are the expectations for loan growth and M&A?
Mid-single digit loan growth and ongoing strategic acquisitions.
