Citi analysts have maintained an overweight position on European banking stocks and adjusted coverage on two lenders, elevating Lloyds to Buy and moving Deutsche Bank to Neutral/High Risk. The changes reflect what the team described as more favorable earnings dynamics and valuation support after recent market swings related to the Middle East conflict.
In Thursday's note, the research team led by Andrew Coombs said the most pronounced upward revisions to their earnings per share (EPS) forecasts are concentrated among UK domestic banks, with Lloyds singled out for the largest increase. They linked the improvement to a rise at the long end of the UK yield curve, which they said is important for reinvestment of the structural hedge.
Citi also identified HSBC, NatWest and Societe Generale as its preferred stocks within the sector. The analysts emphasized that banks remain among the few sectors still experiencing EPS upgrades, reporting a +3% change year-to-date. They noted that 79% of banks delivered 4Q25 consensus profit before tax (PBT) beats and that 2026 outlook commentary has been constructive.
The team highlighted that the biggest cumulative earnings upgrades so far this year have come from HSBC, BNP Paribas and Santander. Citi added that its forecasts are most above consensus and company targets for BBVA, HSBC, NatWest and Societe Generale.
Addressing concerns that geopolitical tensions in the Middle East or growth of private credit would cause structural harm to European lenders, Citi pushed back. The analysts argued that the post-conflict market selloff appeared driven more by positioning adjustments than by changes to underlying fundamentals. They now expect further earnings upgrades rather than downgrades following the recent move in forward interest rates.
With the forward curve shifting to imply two European Central Bank (ECB) rate hikes this year - up from zero previously priced in - Citi revised its 2027 EPS estimates across most names by between -2% and +7%.
On the private credit concern, the analysts characterized the risk as overstated in market discourse. They pointed out that private credit represents under 2% of total sector loans and roughly 3-6% of wholesale bank loans. Recent stress among non-bank financial institutions was described as stemming more from operational issues than from underlying credit deterioration.
Citi also flagged artificial intelligence as a medium-term earnings driver for European banks, while noting that relatively few institutions have provided quantifiable targets. For those banks that have outlined expectations, the suggested benefit is a 2-4% uplift to profit before tax over three years. On costs, Citi said European banks broadly target cost growth at or below inflation, with three institutions - Intesa, Societe Generale and UniCredit - aiming for an absolute reduction in costs. The analysts expect sector cost growth of around 1-2% per year.
Regarding lending and deal activity, Citi reported that banks in Benelux, Ireland, the UK and Spain are targeting mid-single-digit loan growth. The team named ABN Amro, AIB, NatWest and CaixaBank as the strongest plays on that loan-growth theme.
The analysts further anticipate continued M&A activity where they see clear financial and strategic rationale. They cited Santander’s pursuit of Webster, NatWest’s approach for Evelyn Partners, and a conceivable UniCredit-Commerzbank combination as examples of transactions with compelling logic, while acknowledging that significant obstacles remain for some deals, particularly the potential UniCredit-Commerzbank tie-up.
Context and implications
Citi’s note frames the European banking sector as one of the few equity segments currently experiencing net upward earnings revisions. The combination of an improved forward rate outlook, selective cost control targets, potential AI-driven efficiency gains, and pockets of loan growth has led the firm to upgrade select names and retain an overall overweight stance.