European banks overtake US ones: stocks at their best since 2008 and record profits

Many European banks , according to FactSet data, have recently seen their valuations return to book value , compared to JPMorgan 's 2.4 times book value and Goldman Sachs 's double book value. European banks, undercapitalized on the eve of the financial crisis , spent the post-crisis years building capital buffers mandated by regulators, which limited dividends to shareholders. Meanwhile, a decade of near-zero or subzero interest rates has made it difficult for lenders to raise money.

The situation changed after the Covid pandemic, when central banks began raising interest rates to combat inflation and reversed their vast bond-buying programs. Long-term interest rates have risen rapidly, with 30-year German government bond yields now 1.3 percentage points higher than two-year yields, which were lower just two years ago. In the United Kingdom, the gap is more than 1.5 percentage points.

This has led to a substantial increase in banks' net interest margin , the difference between what they earn from loans and other activities and what they pay for deposits, which has been a key driver of profitability . Those with trading activities have benefited this year from the increased market volatility caused by Donald Trump 's economic policies.

It's still unclear whether European banks will be able to continue their run without the benefit of rising long-term rates. Lenders have been ramping up businesses like asset management to hedge against interest rate fluctuations, but political resistance to mergers , such as BBVA 's bid for Sabadell and UniCredit 's bid for BPM , is "seen as a limit to the sector's growth potential." Francesco Sandrini, global head of multi-asset strategies at Amundi , said that "banks appear to be the cleanest piece of the basket," but that "there's a growing sense that the best is over."

Shares of major European banks have reached their highest levels since the 2008 global financial crisis , thanks to a sharp rise in long-term interest rates that fueled bumper profits . The Financial Times reports this, calling it a " rebirth ," citing the cases of HSBC , Barclays , and Santander , as well as UniCredit , which "hit its highest level since 2011." The rise marks a turning point for one of Europe's most unpopular sectors, which has struggled to recover from past crises and compete with US rivals.

"European banks have gone from pariah status to market darlings," Justin Bisseker , European banking analyst at fund management firm Schroders , told the FT. A combination of the "transformative impact of higher interest rates on revenues," a favorable economic environment, and measures to improve efficiency have given lenders a boost, he added. Although HSBC shares fell after the bank missed analysts' expectations for its second-quarter results, and bank stocks fell sharply in the wake of US tariffs , banks in the benchmark European Stoxx 600 index are still up 34% year-to-date.

This outperformed their US counterparts, slightly above the expected return for 2021 and in line with their best performance since 2009. Investors have been encouraged to focus on European banking stocks by growing economic optimism in the region, an improving outlook for their loan portfolios, and valuations lower than those of US giants such as JPMorgan Chase and Goldman Sachs .