Old meets new economy: AI boom to supercharge European banks rally
BlackRock says banks are ‘cost winners’ of AI boom
Despite strong rise, European banks remain undervalued
McKinsey says AI could add $340 billion a year to global banking
LONDON, Dec 15 (Reuters) – After a stellar 2025, investors expect shares of European banks to continue rising in 2026, boosted by strong earnings and, most importantly, cost savings from artificial intelligence.
As fears of recession and interest rate cuts by the European Central Bank faded, investors turned more positive towards European banks, raising their expectations for the sector despite a complex environment.
Meanwhile, artificial intelligence has emerged as a new force drawing investors into European lenders’ shares; This is partly because the scarcity of technology companies in the region has forced many to pursue those leveraging artificial intelligence in old economy markets.
Banks have begun using artificial intelligence to increase operational efficiency and fraud detection and reduce personnel costs.
“European banks could be a real beneficiary of AI,” said Helen Jewell, chief investment officer of core equities at BlackRock, the world’s largest asset manager, which manages about $12 trillion.
“Much of the AI story has focused on revenue earners, but we also know that there is a beneficiary of cost earners when it comes to AI,” he said at a press event.
In a note to investors, UBS said it sees AI as a significant source of potential upside for banks’ short-term valuations and long-term earnings.
However, this also brings risks.
Enthusiasm about AI and warnings about the risks of a dot-com-style collapse have come from a variety of parties, including the International Monetary Fund and the Bank of England. And the risks are not just related to AI.
The ECB said euro zone banks face ‘unprecedentally high’ risk of shocks, including geopolitical tensions, changing trade policies, climate-related crises and even a dollar squeeze for banks exposed to the volatile US currency.
However, investors seriously grabbed bank stocks. Societe Generale shares have gained 140% this year, Commerzbank shares have gained 125% and Barclays shares have gained almost 70%. The European bank share index is up more than 60% on top of a 25% rise in 2024 and is four times better than the pan-European index.
Investors also see them as relatively cheap, especially compared to U.S. banking stocks. European bank shares currently trade around 1.17 times price-to-book, about 40% below their 2007 peak and below 1.7 times their U.S. rivals, according to LSEG data.
JUMP IN EARNINGS EXPECTATIONS
In terms of costs, Goldman Sachs said in a note that costs will rise at a compound annual rate of only 1% between 2025 and 2027. The US bank also predicts that efficiency will continue in 2026, with banks’ cost/income ratios increasing by 130 basis points annually; This means companies are expected to spend less to generate revenue.
Consulting firm McKinsey estimated last year that artificial intelligence could bring as much as $340 billion in additional value annually to the global banking industry and a 20% reduction in operational costs.
Even if it takes years for AI application savings to fully emerge, it would be a big enough shift in valuations to warrant further expansion, UBS said.
Last month, analysts increased their net revisions for the sector by the most since May 2023, and 12-month forward earnings growth expectations rose to the highest level since 2023, according to IBES data.
Growth in bank lending to euro zone firms is still near its highest level since mid-2023, according to the latest ECB data. While credit growth to businesses remained unchanged from the previous month at 2.9% in October – just under 3% in August, the highest level since May 2023 – credit growth to households rose from 2.6% to 2.8%, the highest level in 2.5 years.
BlackRock’s Jewell expects European banks to return 20-25% of market value to shareholders through dividends and share buybacks over the next three years.
“If you combine valuation with shareholder compensation, you still have a very attractive asset class,” said Domenico Ghilotti, co-head of research at Equita, adding that merger activity is another driver supporting the sector.
The takeover of Mediobanca by state-backed Monte dei Paschi di Siena was one of the largest in the sector this year and transformed Italian banking. Other deals may be on the way.
“What we’re seeing is economic resilience in Europe, and that means economic resilience will be good for European banks, even if we see more rate cuts,” BlackRock’s Jewell said.
(Reporting by Joice Alves; Editing by Amanda Cooper and Susan Fenton)
