The main driver in 2025 was the combination of interest rates that remain high and an unprecedented wave of mergers and acquisitions. With 68 deals of over $10bn and global transaction volume reaching $4.5 trillion, investment banks benefited from a massive influx of fees, while universal banks enjoyed historically strong net interest margins. Contrary to fears voiced in early 2025, a recession did not materialize, asset quality remained broadly under control and loan-loss provisions stayed low. The worst that was expected never came, and investors gradually brought the sector back into their allocations 

Source: MarketScreener

In Europe, this momentum has translated into a clear improvement in fundamentals. Major banks now post comfortable capital ratios, often well above regulatory requirements, paving the way for more aggressive distribution policies. Swedbank is emblematic: the closing of US investigations without significant penalties now allows a gradual reduction of its CET1 surplus and higher shareholder returns, with a target ROE above 15% by 2027. Even if that goal looks ambitious versus the consensus, it illustrates the sector's regime change, now more focused on returns on capital than on mere regulatory survival.

Nordic and Northern European banks reinforce the trend, with earnings outlooks that are broadly solid but differentiated. Danske Bank, SEB and DNB benefit from favourable fee trends and tight cost control, while Nordea and Handelsbanken face more cautious expectations for net interest income. The message is clear: the phase of broad-based gains is probably behind us, and 2026 will be a year for selection, with valuation gaps increasingly reflecting differences in operating trajectories and financial discipline.

Large euro zone banks show a similar profile. ING, for example, combines robust earnings generation, a gradual improvement in operating efficiency and still-modest valuation, with a P/E below 8x on some estimates for 2028. Stabilising NII, the growing integration of artificial intelligence into processes, and the ability to keep the cost of risk low support a credible earnings-growth scenario beyond 2026. AIB, meanwhile, delivers structurally high profitability and a substantial excess of capital, but already trades on demanding multiples, suggesting more limited near-term upside despite very attractive shareholder returns.

The key factor for 2026, however, remains the path of interest rates and, more broadly, the debt cycle. Expected policy-rate cuts should be gradual, while long-term yields remain under pressure because of massive public deficits. This set-up, often described as Goldilocks, stays favourable for banks as long as the yield curve does not flatten abruptly and credit demand holds up. But it comes with more systemic risks. The financial world is operating against a backdrop of extreme global indebtedness, and European banks-once again central to the continent's stock-market capitalisation-are concentrating a growing share of potential vulnerabilities, notably through indirect exposures to non-bank finance and private debt.

So, should you still invest in European banks in 2026? The answer needs to be carefully considered. The sector is no longer obviously undervalued as it still was in 2022 or 2023, but it remains attractive relative to other parts of the market, particularly against the valuation excesses seen in some growth themes. Banks now offer a rare combination of high returns on capital, generous distributions and reasonable valuations. However, the upside now hinges on execution, cost discipline, capital management and balance-sheet quality far more than on a simple cyclical tailwind 

In 2026, investing in European banks still makes sense, provided any one-size-fits-all approach is abandoned. The sector has once again become a market pillar-and therefore a focal point for risks as much as opportunities. Value creation will come from institutions able to turn excess capital into durable profitability without overexposing themselves to the imbalances of an overindebted world. In this new equilibrium, banks matter again. And that is precisely why they must be approached with clarity, selectivity and rigour.