A look back at a great quarter and a standout year
- Bank earnings maintained their momentum in Q3. The beat rate across NII, fees, asset quality and costs was above 70%. Forward EPS were revised up by c. 2%.
- NII was overall in-line with consensus in Italy, France, Germany and the Benelux. Nordic banks surprised somewhat positively. UK/Asian and CEE banks printed large beats to consensus NII.
- Fees were boosted by record inflows in Asian wealth, strong trading, and improved market valuations.
- CET1 was the highlight of the quarter, with a median beat of 10 bps, demonstrating the ability of banks to grow capital-light revenues and optimise RWAs through SRTs.
- Banks have shined throughout the year, consistently leading the European market in terms of beat rates and EPS upgrades.
2026 outlook: growth at a discount, with upside to consensus EPS
- Banks are growing revenues again, due to balance sheet expansion, a shift away from term deposits, and strong savings inflows. Capital markets revenues are set to benefit from a catch-up in the Origination and Advisory business.
- Banks remain statistically cheap versus most other sectors and their international counterparts despite their improved quality.
- A private sector releveraging from low levels, M&A synergies, costs optimisation through AI offer unpriced upside optionality.
- The cash carry of 8%-9% offers a strong buffer from downside risks. Distributions could be further boosted from a broadening of SRT usage across banks.
Portfolio positioning: protecting the base case against macro risks
- The global economy is becoming harder to read. US data (jobs, spending, industrial) is softening. French political/fiscal uncertainty is high. Europe inflation may surprise to the downside next year. On the other hand, fiscal and monetary stimulus remains strong.
- We favor a quality approach given low valuation dispersion and mounting macro uncertainty. We see a strong base case for the sector but chose to protect the portfolio against potentially underpriced macro risks (lower rate curves, wider sovereign spreads, private credit).
- Picks (High Resilience/Capital Return): DNB, Unicredit, UK banks, and specialist (re)insurers.
- Underweights: rate-sensitive banks (Spanish/Italian regionals); high legal tail risks (BNP, SEB) ; IB names and UK life insurers (private credit risks).
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