LIVE MARKETS-Morgan Stanley sees 22% upside for European banks next year

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MORGAN STANLEY SEES 22% UPSIDE FOR EUROPEAN BANKS NEXT YEAR

Within Morgan Stanley's broader "Big Debates 2026" note covering key themes across European markets and sectors, banks stand out once again as a key pick.

"With the rate cut cycle in the euro area ended, or very close to ending, we believe NII bottomed for the sector as a whole in 2Q25, and from here on it should accelerate, driven by the steeper yield curve and volume growth," say MS analysts.

"The SX7E index is up over 70% year to date, but we believe there is further upside as the sector shifts from earnings normalisation to a cyclical recovery."

Morgan Stanley forecasts an 11% compound annual growth rate in earnings per share from 2025 to 2028, and expects a further re-rating as the sector remains undervalued relative to this growth potential and historical standards.

Net interest income should accelerate, driven by the steeper yield curve and rising loan volumes as economic activity improves. Deposit margins are also expected to expand, along with loan growth, which is forecast to double to 4-5%.

Cost efficiency is another plus, with digitalisation and AI expected to slash the cost-to-income ratio to below 50% by 2027-28, boosting profitability alongside revenue growth.

All in all, MS says the sector could reasonably re-rate to 12 times expected earnings, from 9.8 times currently, suggesting an upside potential of as much as 22% over the next year.

(Danilo Masoni)

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