Stock markets in Europe see significant increases, marking a first in three months for weekly gains
In a notable shift, the eurozone banking index rose 1.9% today, marking the best sectoral performance since the beginning of the year. This surge is driven by a combination of strong profits, robust capital adequacy, rising mergers and acquisitions (M&A) activity, and attractive valuations in the sector.
The aggregate return on equity (ROE) for major European banks increased to 9.85% in Q1 2025, up from 9.54% the previous quarter and 9.67% a year ago, signalling improving profitability. The Common Equity Tier 1 (CET1) ratio, a key measure of bank capital strength, also rose to 16.05% in Q1 2025, indicating banks are well-capitalized and able to absorb risks.
The non-performing loans ratio declined slightly to 2.24%, and loans with significant credit risk showed a marginal improvement compared to prior quarters, indicating better asset quality. This trend is further underscored by record M&A activity, with over $27 billion worth of European banking deals announced since early 2025, nearly doubling from prior periods.
European bank stocks are seen as undervalued relative to their growth prospects, aided by the availability of ETFs like EBNK that provide investors easy access to the sector. As a result, European banks have outperformed major US banks year-to-date in 2025.
The strong performance of European bank stocks contributes to gains in broader European equity indices such as the STOXX Europe 600, which has delivered solid year-to-date returns based on improving fundamentals. Rising bank capital and profitability suggest resilience against economic shocks, encouraging broader investment inflows.
However, the sector's sensitivity to policy and macro factors means continued regulatory support and stable credit conditions are important to sustain these positive trends. Any adverse changes could impact valuation and confidence.
Elsewhere, the defense sector has seen year-to-date gains of 51.4 percent, while the insurance sector faced a slightly different trajectory, with shares falling 1.6 percent. Notably, shares of German reinsurance company Munich Re fell 7.2 percent.
Geopolitical developments, particularly regarding a possible ceasefire between Russia and Ukraine, are causing uncertainty and are being closely monitored by investors. The United States and Russia are reportedly seeking to reach an agreement to cease the war in Ukraine, but no new facts regarding this agreement were presented.
Despite these uncertainties, the strategists at Bank of America Global Research stated that "financial sectors are back to be the most prominent." Analysts highlighted strong corporate performance during the earnings season as a factor for bank stock gains.
In a separate development, the pan-European STOXX 600 index posted its biggest weekly gain in 12 weeks on Friday. The London Stock Exchange Group compiled the data regarding the companies' earnings, which showed that of the 198 companies listed on the STOXX 600 index that reported earnings as of Tuesday, 53 percent exceeded analysts' expectations.
Shares of German reinsurance company Munich Re fell 7.2 percent, while Insurance sector shares hit an all-time high a day ago. The insurance sector's performance contrasts with the positive trends seen in the banking sector, suggesting a more complex landscape in the European financial market.
Investors are increasingly attracted to the banking sector due to its strong performance, with European bank stocks outperforming major US banks year-to-date in 2025. This has contributed to gains in broader European equity indices like the STOXX Europe 600, as improving fundamentals indicate resilience against economic shocks and attract investment inflows.
Amidst this positive trend, analysts at Bank of America Global Research have stated that the financial sectors, including banking, are back to being the most prominent, driven by strong corporate performance during the earnings season and undervalued stock valuations. However, continued regulatory support and stable credit conditions are crucial to sustaining these positive trends in the banking sector.
