European banks have shaken off a weak first quarter to notch solid share price gains in the year to date, but Citi analysts warn their momentum may be fading. The Stoxx 600 Banks Index is up around 21% in the year to date, according to LSEG data. That represents a slowdown from the regional benchmark’s stellar 66.95% rise in 2025, when financials benefited from stronger-than-expected profitability and a rotation into Europe from value-hunting investors looking to avoid U.S. volatility. But it still puts European banks in line with their U.S. peers in the KBW Nasdaq Bank Index , which is up 22% year to date. Banks have outpaced most of the other biggest European sectors, including industrials (up 14.8%), utilities (up 10.4%), healthcare (up 1.5%) and consumer products and services (down 9.8%). Only oil and gas stocks, up 31%, have been stronger performers. European bank profits have remained resilient despite the impact of lower interest rates relative to international rivals, Iran war volatility and exposure to the private credit market , allowing them to deliver healthy dividends and unexpected share buybacks. Continued speculation over dealmaking, such as UniCredit ‘s attempted takeover of Commerzbank , has led to spikes in individual names. Investors are watching closely where banks are deploying the excess capital they have accumulated in recent years. In a Wednesday note, Citi analysts said they continued to see upside in European banks, listing their top picks as the Netherlands’ ABN , the U.K.’s NatWest , and France’s Societe Generale . The sector continues to offer a more attractive capital return yield than any other in Europe, according to the investment bank’s research. In second-quarter earnings, 83% of banks beat pre-tax profit expectations and “most” upgraded their full-year guidance due to higher revenues, the analysts said. Some of the biggest earnings per share upgrades came from Caixabank , HSBC , ABN and Santander . However, they added that “we are now closer to the end of the current bull run,” with valuations no longer looking “excessively cheap.” “Banks are still seeing [earnings per share] upgrades, mainly on a superior revenue outlook, but upgrades have now broadened to other sectors too, reducing the scarcity value,” they wrote. Future earnings upgrades are more likely to be driven by either acquisitions or higher business volumes, supported by new initiatives to capitalize on the AI capital expenditure boom, they continued. That is strategically savvy but is “likely to come at the expense of buybacks,” the Citi team said. “One should not underestimate the sentiment and technical support buybacks still provide,” they added.
