Citi Recommends Three European Bank Stocks Following Recent Sell-Off

European bank stocks recorded strong performance in 2024, achieving their best year since 1997, with valuations of some lenders more than doubling. -Iran conflict in March, interrupting three years of nearly continuous positive returns. The Stoxx 600 Banks index dropped as much as 10% at the height of the conflict and stands 1% lower year-to-date.

Citigroup analysts published a note on Thursday outlining their views on the sector. They recommended HSBC, NatWest and Societe Generale as the top three picks. The analysts also upgraded Lloyds to 'buy' and Deutsche Bank to 'neutral'.

pointed to continued upgrades in earnings per share estimates as a key factor.

These upgrades stem from revenue outlooks and improved cost guidance at several banks. Fears related to Middle East conflict disruptions and private credit concerns were described as overstated by the analysts. " — Citigroup analysts (CNBC) The forward interest rate curve indicates two European Central Bank rate hikes this year, which analysts view as supportive for bank earnings.

banks hold excess capital that could support share buybacks, loan growth or mergers and acquisitions.

Analysts noted increasing willingness among banks to pursue M&A, though share price responses to such deals have varied. Potential obstacles exist for specific transactions, such as a UniCredit-Commerzbank deal. The sector's performance in 2024 built on prior gains, but the March conflict introduced volatility.

Stakeholders including investors, bank executives and regulators monitor capital allocation strategies amid economic uncertainties. Future ECB policy decisions and geopolitical developments may influence the trajectory of European bank stocks.