Citi Boosts Outlook on European Lenders Amid Earnings

Key Moments

Upgrades for Lloyds and Deutsche Bank

Citi analysts reiterated their overweight stance on European banks and highlighted the sector as one of the limited areas in the market still experiencing earnings forecast upgrades. As part of this view, they raised their rating on Lloyds to Buy and on Deutsche Bank to Neutral/High Risk.

The team pointed to stronger earnings dynamics and more attractive valuations following recent volatility connected to the Middle East conflict. They argued that these conditions have created a more favorable setup for both names.

“The largest increase in our EPS forecasts is for UK domestic banks, and most notably Lloyds, as the UK has also seen a shift higher in the long-end which is important for reinvestment of the structural hedge,” analysts led by Andrew Coombs said in a Thursday note.

Sector Leaders and Earnings Revisions

Citi highlighted HSBC, NatWest, and Societe Generale as its preferred picks within the European banking universe.

“Banks are one of the few sectors still seeing EPS upgrades, up +3% YTD, with 79% of banks reporting 4Q25 consensus PBT beats and 2026 outlook commentary constructive,” the analysts wrote.

According to the note, the largest year-to-date earnings upgrades have occurred at HSBC, BNP Paribas and Santander. Citi added that its estimates stand most above both consensus and company targets for BBVA, HSBC, NatWest and SocGen.

Macro and Market Backdrop

The analysts addressed concerns that the Middle East conflict and the expansion of private credit could inflict lasting damage on European banks. They argued that the sector’s selloff following the conflict was driven mainly by positioning rather than underlying fundamentals. Against the backdrop of recent moves in forward interest rates, they now anticipate further earnings upgrades instead of downgrades.

With the forward curve shifting from zero to two anticipated European Central Bank rate hikes this year, Citi revised its 2027 EPS projections for most covered banks within a range of -2% to +7%.

Private Credit and Risk Considerations

The note suggested that worries about private credit are overstated. The analysts said private credit represents less than 2% of total sector loans and approximately 3-6% of wholesale bank loans. They added that recent stress among non-bank financial institutions has been driven by operational issues rather than credit quality concerns.

Citi therefore framed private credit as a manageable factor within the broader sector risk profile, rather than a structural threat to European lenders.

AI, Cost Discipline, and Profitability

The analysts identified artificial intelligence as a potential medium-term boost to sector earnings, while cautioning that only a limited number of banks have disclosed concrete targets so far. For those that have, the projections point to a 2-4% uplift in profit before tax over three years.

They noted that European banks are generally aiming to keep cost growth at or below inflation. Three institutions – Intesa, SocGen and UniCredit – are targeting an outright reduction in total costs. Citi expects overall sector costs to rise by around 1-2% per year.

Loan Growth, Geographic Themes, and M&A

On the lending side, banks in Benelux, Ireland, the UK and Spain are targeting mid-single digit loan growth. Within this theme, Citi singled out ABN Amro, AIB, NatWest and CaixaBank as the preferred ways to gain exposure.

The analysts also foresee merger and acquisition activity continuing across the sector. They see “compelling financial and strategic logic” in Santander’s pursuit of Webster, NatWest’s approach for Evelyn Partners, and a potential UniCredit-Commerzbank deal, although they emphasized “major obstacles” to the latter transaction.