Morgan Stanley reiterated a positive view on the European banking sector after fourth-quarter results produced another sequence of earnings surprises and triggered upward revisions to forward estimates.
According to the bank, companies representing about 65% of the sector's market capitalization have reported results to date. On average these banks exceeded expectations by 4% at both the pre-provision operating profit (PPOP) and profit before tax (PBT) levels. The bank noted this marks the 28th consecutive quarter of PPOP outperformance, with 73% of banks coming in ahead of consensus.
"Ppop was 4% better on average, with 73% of banks beating estimates, largely driven by strong net interest income (NII) and fees," Morgan Stanley analysts wrote, adding that they "retain our positive view on banks." The commentary highlights a repeatable earnings beat pattern across the sector rather than isolated surprises.
Net interest income continued to expand, increasing 2% quarter-on-quarter in the eurozone and landing 3% ahead of consensus forecasts. Fees also improved, rising 8% sequentially and exceeding expectations by 2%. While investment banking fees were mixed across institutions, trading revenues held up strongly. Costs were broadly in line with consensus estimates despite a seasonal uptick.
Following the results reported so far, Morgan Stanley said consensus earnings per share (EPS) estimates have been nudged up by roughly 2% for both 2026 and 2027. Analysts attributed these upgrades primarily to better revenues and provisions, which have been partially offset by somewhat higher costs.
On deposits, the bank pushed back against what it described as overstated concerns about intensifying competition. Analysts pointed to generally stable pass-through rates and an improved deposit mix as evidence that deposit pressure is not uniformly worsening. "We believe this is more to do with individual company strategies and online deposits, than an overall trend," they said.
Supporting the view of stable funding, December data cited by the bank showed eurozone private-sector deposits up 3% year-on-year, with loan growth steady at 2.5%. Mortgage and corporate loan originations remained robust, which Morgan Stanley said supports expectations for stronger volume growth into 2026.
Valuation metrics also contributed to the constructive tone. The sector trades at about 10.9x price-to-earnings and sits at a roughly 34% discount to the broader market, even as earnings revisions for banks rank among the strongest across European industries.
"Banks valuations are no longer distressed, but that doesn’t mean they are not good investments," the analysts said, reiterating their Attractive industry view. The combination of recurring operating outperformance, a recovering fee mix, steady loan origination, and supportive valuation underpins the bank's continued optimism.
Implications and context
The results and the analyst reaction underscore a sector in which revenue drivers - notably NII and fees - are regaining momentum, while funding conditions and loan demand are steady enough to support modest upgrades to consensus earnings. Costs and the mix of investment banking fees introduce some variability, but the overall picture presented by the reported cohort has been constructive.