European banks are entering a new era. Investors are increasingly bullish, expecting shares to climb higher in 2026 after a strong 2025. The driving force? Artificial intelligence and cost-cutting strategies that could reshape the industry.
Following fears of a recession and potential interest rate cuts by the European Central Bank, sentiment has turned. Investors are now seeing European banks as undervalued gems in a volatile market.
Artificial intelligence has emerged as a surprising hero for these “old economy” institutions. With fewer homegrown tech giants in Europe, investors are searching for AI beneficiaries among traditional banks.
Banks are integrating AI to boost efficiency, detect fraud faster, and reduce staffing costs. This technological adoption is reshaping the way banks operate.
“European banks could be a real beneficiary of AI,” said Helen Jewell, chief investment officer for fundamental equities at BlackRock, the world’s largest asset manager.
Jewell highlighted that AI is not just about generating new revenue. “A lot of the AI story has been focused on the revenue winners, but we also know that when it comes to AI, there is a beneficiary from the cost winners,” she said at a press event.
UBS also sees AI as a key driver for potential upside in banks’ near-term valuations and long-term earnings.
Yet, experts caution that risks remain. The International Monetary Fund and the Bank of England have warned of AI-related hype, drawing comparisons to the dot-com bubble.
AI is not the only risk. The ECB has stated that eurozone banks face “unprecedentedly high” shocks from geopolitical tensions, shifting trade policies, climate crises, and even dollar volatility affecting banks exposed to U.S. currency fluctuations.
Despite these risks, investors have shown strong confidence. Societe Generale shares rose 140% this year, Commerzbank 125%, and Barclays nearly 70%.
An index of European bank stocks is up more than 60% in 2025 alone, on top of a 25% gain in 2024, outperforming the broader pan-European index by more than four times.
European banks are also seen as cheap compared to U.S. peers. Currently, they trade around 1.17 times their price-to-book value, about 40% below their 2007 peak, while U.S. banks are at 1.7 times.
Goldman Sachs notes that costs in European banks are expected to grow only 1% annually between 2025 and 2027. Efficiency improvements continue, with cost-to-income ratios projected to improve by 130 basis points year-on-year.
Consulting firm McKinsey estimated that AI could add up to $340 billion annually to the global banking industry, reducing operational costs by as much as 20%.
Even if full AI savings take years to materialize, they are expected to significantly boost bank valuations, UBS analysts said.
Analysts recently raised net revisions for the sector, with 12-month forward earnings growth expectations hitting their highest since 2023, according to IBES data.
Credit growth in the eurozone remains strong. Lending to businesses is near the highest level since mid-2023, while household loan growth hit a 2.5-year high in October.
BlackRock’s Helen Jewell expects European banks to return 20-25% of market value to shareholders over the next three years through dividends and share buybacks.
Equita’s Domenico Ghilotti notes that mergers and acquisitions are adding to sector strength. The state-backed takeover of Mediobanca by Monte dei Paschi di Siena reshaped Italian banking, and more deals may follow.
“What we are seeing is economic resilience within Europe,” Jewell said. “Even if we see more rate cuts, that economic resilience will be good for European banks.”
The AI-driven cost efficiencies, strong lending growth, and M&A activity combine to create an environment where European banks could outshine many tech investments.
In a market where tech companies dominate headlines, the AI boom in traditional banks could redefine where investors look for growth.
For investors, the message is clear: European banks are not just surviving, they are innovating and thriving.
As the world watches AI reshape industries, Europe’s banking sector may become the unexpected hero of the new economy.
