Is it too late to jump on the European bank bandwagon?

European banks have had a stellar run, even outperforming the ‘Magnificent Seven’ during the past three years, but at this juncture, investors may be wondering how much further they can go.  

Yet we believe there are at least five reasons to keep faith with European financials and we continue to be significantly overweight both banks and insurers within our Artemis SmartGARP European Equity Fund. 

Earnings revisions: First and foremost, European banks experienced the largest upgrades to profit forecasts of any sector during the most recent Q2 earnings. We have found that companies experiencing upgrades usually go on to outperform, so estimate revisions are one of the eight factors we track in our SmartGARP stock-screening tool. In fact, estimate revisions are such a powerful forward-looking indicator of returns that we double-weight this factor in SmartGARP when we give stocks an overall score. 

Net interest margins: Granted, profits are no longer being supercharged by 4% interest rates, but 2% is better than zero and banks are still benefiting from substantial net interest margins (the difference between the interest banks charge on loans and the rates they pay out on customer deposits). 

Valuations: Euro area banks are still trading at a steep discount to the broader European equity market despite strong recent returns and superior fundamental growth. Indeed, the Euro STOXX Banks index has a trailing price-to-earnings ratio (excl. negative) of 9.7 versus 16.5 for the Euro STOXX index, as at 29 Aug 2025¹. 

What’s more, many banks are implementing shareholder-friendly measures, such as buying back shares and raising dividends.  

Macroeconomic tailwinds: The macroeconomic backdrop is also supportive. Europe’s economic resurgence, propelled by Germany’s colossal infrastructure and defence spending commitments, should continue to act as a further tailwind for the region’s banks and the broader stock market. 

Stronger balance sheets: Finally, after a long period of cost cutting and balance sheet repair following the global financial crisis and the eurozone debt crisis, European banks have become much healthier businesses. They are now starting to grow their lending books, which should enhance profitability. 

A broader point to make is that sometimes sectors go through long periods of underperformance – as banks did between the financial crisis and about 2021 – until catalysts spark a revival. In the case of banks, new management teams cut costs and restructured balance sheets, then interest rate hikes bolstered profitability.  

Our quantitative SmartGARP tool helps us spot signs that sectors and individual companies are experiencing a change in fortunes, such as analysts upgrading their forecasts. 

European banks may be floating on a rising tide but it has not lifted all boats equally. As active managers, we can skew the odds further in our favour by picking banks with more attractive valuations and superior growth prospects. Doing so should continue to deliver returns even if the overall banking sector cools off – which, I might add, is something we do not expect to happen just yet. 

For instance, UniCredit has been a fantastic performer since 2021 but has more recently fallen into line with its sector, whereas Société Générale (SocGen), a laggard until late last year, is attractively valued with improving fundamentals. As such, we switched a large proportion of our UniCredit exposure into SocGen in February and it has been one of the biggest contributors to our performance this year. 

SocGen has top-decile SmartGARP scores across revisions and momentum, reflecting the success of chief executive Slawomir Krupa’s turnaround plans and cost management initiatives. The bank’s second quarter results this summer beat expectations owing to a rebound in its French retail business and higher net interest income, leading SocGen to raise its annual profit target.  

Meanwhile, SocGen continues to trade at almost half the market multiple, despite its share price having almost doubled year-to-date. 

Besides SocGen, two other banks feature within the Artemis SmartGARP European Equity Fund’s 10 largest holdings: Hungary’s OTP Bank and Spain’s Banco Santander.  

OTP is not quite as cheap as SocGen but is still discounted, despite recent outperformance. It has top-decile scores in our screening tool for growth, revisions, momentum and accruals (which covers accounting practices and aspects of corporate governance).  

Santander sits in the top 2% of companies through the SmartGARP lens. It is cheap, under-owned, buying back shares and paying out a dividend, taking its all-in shareholder yield close to 7%². 

The SmartGARP scores enable us to screen a broad universe, build up our relative preferences across the market and within sectors, and identify the best opportunities at any given time. After running the screening tool, the fund managers carry out due diligence on the stocks that score highly.  

At the moment, evidence suggests the banking sector continues to be an attractive place to invest. 

Harry Eastwood is an investment director for the Artemis SmartGARP European Equity Fund.