Investors show renewed interest in European banks thanks to AI
European banks are back in the spotlight with investors, fuelled by strong earnings and cost reductions thanks to artificial intelligence (AI). Despite persistent concerns about recession and possible interest rate cuts by the European Central Bank (ECB), the sector’s outlook remains positive.
The scarcity of technology companies in Europe has prompted investors to look for opportunities in traditional sectors such as banking, which are embracing AI. Banks are using AI to increase operational efficiency, improve fraud detection and reduce staffing costs. That trend is attracting a lot of attention, and analysts are forecasting significant potential gains in bank valuations and profits.
This optimism is tempered by a degree of caution. Concerns have been raised about excessive exuberance around AI and the risk of a stock market crash similar to the dotcom bubble. In addition, the ECB has highlighted unprecedented risks for banks in the eurozone, including geopolitical tensions, developments in trade policy, climate-related crises and potential dollar shortages for institutions exposed to volatility in the US currency.
Despite these risks, investors remain enthusiastic about European bank stocks. Société Générale, Commerzbank and Barclays have all posted notable share price gains this year. An index tracking European bank shares has significantly outperformed the broader market.
European banks are seen as relatively undervalued compared with their US peers. Analysts forecast sluggish cost growth in the coming years and significant improvements in cost-to-income ratios. Consultancy firm McKinsey has calculated that AI could generate substantial value for the global banking sector, with potential savings of up to 20 percent of operating costs.
Investor sentiment towards European banks has recently strengthened, with analysts raising their profit growth forecasts to the highest level since 2023. Lending activity within the eurozone also remains robust. Helen Jewell of BlackRock expects European banks to return a substantial portion of their market value to shareholders over the next three years through dividends and share buybacks.
Business AM
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