The only UK bank share to make this top six for 2026
A City analyst has named its favourite half-dozen European bank stocks. Graeme Evans reveals the only UK bank in the list and looks at another round of broker upgrades.
25th November 2025 14:23
by Graeme Evans from interactive investor
Sector-leading growth prospects have given Barclays (LSE:BARC) top pick status after a City firm named the six European banks it favours to continue the industry’s strong performance into 2026.
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Deutsche Bank said Barclays’ investment banking upside and significant benefit from the structural hedges used to smooth out interest rate volatility were factors in its support.
Bank of Ireland Group (LSE:BIRG), Commerzbank AG (XETRA:CBK), Banca Monte dei Paschi di Siena (MTA:BMPS), Erste Group Bank AG. (XETRA:EBO) and Eurobank are its other picks. Barclays is backed with a target price of 480p, representing 18% potential upside.
On Friday, the same bank sweetened its Buy recommendation on NatWest Group (LSE:NWG) from 600p to 660p and lifted Hold-rated HSBC Holdings (LSE:HSBA) from 950p to 1,050p.
The upgrades continue the positive sector-wide trend after third-quarter results triggered a series of City upgrades to estimates for net profit and net interest income (NII).
S&P Global Market Intelligence noted today that NatWest received the largest 2025 net profit estimate bump at 6.5%, followed by HSBC at 4.8% and Barclays at 3%.
Lloyds Banking Group (LSE:LLOY) was the only bank to receive a net profit consensus downgrade, although this was due to the one-off impact of its motor finance compensation charges.
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All four banks surpassed the consensus for third-quarter net interest income and remain optimistic about the outlook for this key revenue driver in the face of declining interest rates.
Lloyds, HSBC and Barclays all upgraded their NII forecasts for 2025, while NatWest upgraded its overall revenue guidance for the full year.
Structural hedge yields, solid domestic loan growth and improving non-interest income supported the revenue guidance upgrades, according to the analysis by S&P.
Deutsche Bank said in its Europe-wide report that it expects net interest income to re-emerge as the primary top-line growth driver in 2026.
It notes that European banks have significantly enhanced their profitability since Covid and maintained a strong return on tangible equity of 14% or more.
This robust performance has triggered a sector re-rating, including for NatWest and Lloyds Banking Group after their shares recently traded at multi-year highs.
It said: “While the outlook for both profitability and valuation remains positive, we anticipate the improving growth profile of this often-considered ‘ex-growth’ sector to become the third pillar supporting its continued share price performance.”
The bank said fees and investment banking revenues are poised to benefit from both cyclical and structural tailwinds, leading to a forecast for another strong year in non-interest income.
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High capital generation and a largely stable regulatory environment should also enable banks to efficiently plan and allocate capital to the most accretive opportunities.
With rising optimism, Deutsche Bank expects the relative mix to shift from share buybacks towards M&A as lenders focus specifically on “product factories”, domestic consolidation and increased stake building.
The European banking sector currently trades with a valuation of 9.5 times forward earnings. This is modestly above the long-term average but well below the 2018 peak of more than 12 times, when Deutsche Bank notes that key performance indicators were worse than today.
It said the valuation upside is further supported by strong earnings momentum and an attractive relative valuation versus the broader market at an approximate 35% discount. A total yield of approximately 9% should also provide support.
The bank pointed out that all six of its picks are set to expand faster than the sector average annual earnings growth rate of 10%.
On Barclays, it expects dividends to inflect as returns improve.
In 2024, the lender paid a total dividend of 8.4p worth £1.2 billion and announced share buybacks of £1.8 billion. Deutsche Bank’s projections point to a doubling of the dividend by the time of 2027 results, lifting the total capital return yield to about 13.5%.
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