After a few difficult years, the outlook for global banks is starting to improve. Higher interest rates, strong balance sheets and steady customer deposits have helped many banks stay healthy. Even though loan growth has slowed, most banks still appear to be in a strong position. At the same time, many investors remain cautious about the sector, which has kept bank stock prices relatively low compared to their earnings.
Several long-term trends could help banks recover.
Higher interest rates help profits. Interest rates are much higher than they were for most of the decade after the 2008 global financial crisis. In Europe, the European Central Bank's deposit rate was -0.50% in 2019 but rose to 4.00% in 2023, while the Bank of England's policy rate increased from 0.50% in 2009 to 5.25% in 2023.1 Even if rates come down somewhat, we believe they are likely to stay above the very low levels of the past. This is generally good for banks because they can often earn more money on loans than they pay out to depositors. That can increase profits, especially for banks that focus on lending to consumers and businesses. For example, one of our US holdings generated roughly US$47.7 billion in net interest income in 2024, illustrating how important lending spreads remain to bank earnings.2
More stable regulations. Banks operate under many rules designed to keep the financial system safe. While regulators have increased oversight in some areas, the overall rulebook is well understood. When banks know what rules to expect, they can spend less time and money adjusting to changes and more time focused on serving customers, growing their business and investing in new technology. The banking system remains healthy under the current framework; more than 99% of US banks were considered well-capitalized in 2025.3 In Europe, the aggregate Common Equity Tier 1 (CET1) ratio for euro-area banks was 15.8% in 2024, well above regulatory requirements.4
Strong dividends and share buybacks. Many banks earn more capital than they need to run their businesses. As a result, they can return money to shareholders through dividends and share buybacks. Dividends provide investors with regular income, while buybacks reduce the number of shares outstanding, which can increase the value of the remaining shares. Industry estimates suggest European banks distributed more than €123 billion through dividends and share buybacks in 2025, supported by strong profitability, healthy capital ratios and excess capital generation.5
Bank stocks look inexpensive. Compared with many other parts of the stock market, bank stocks trade at lower valuations. In Europe, many banks traded at less than their book value in recent years. This contrasts with growth-oriented sectors, which often trade at several times book value. The valuation discount has narrowed recently, but European banking shares were still widely viewed as attractively valued.6 Investors still worry about things like slower economic growth and potential loan losses. However, many of these concerns may already be reflected in stock prices.
Technology is improving efficiency. Banks are increasingly using artificial intelligence (AI) and automation to handle routine tasks, improve customer service and detect fraud more quickly. These tools can help banks lower costs and operate more efficiently. The scale of investment is significant. Digital transformation spending continues to accelerate globally, particularly outside the United States. In Europe, the Middle East and Africa (EMEA), digital transformation spending is projected to exceed US$1.2 trillion by 2028 (see chart), growing at an annual rate of 15.8%. The financial services sector is forecast to be the largest investor in AI, accounting for more than 20% of total AI spending, with banking leading adoption.7
EMEA Digital-Transformation Spending Expected to Exceed US$1.2 Trillion by 2028
Source: “IDC Says EMEA Digital Transformation Spending to Exceed $1,200 Billion by 2028, Driven by AI and Industry-Specific Investments.” IDC. January 29, 2025. There is no assurance that any estimate, forecast or projection will be realized.
A Penny Earned?
Overall, we believe banks appear well positioned for the years ahead. Higher interest rates, stable regulations, attractive shareholder returns, low valuations and new technology could all support stronger earnings and stock performance. While risks remain, the sector offers a combination of stability, income and growth potential that many investors would find appealing.
Market review
Global equities rebounded strongly in the second quarter of 2026, reversing the weakness seen at the end of the first quarter as markets recovered from the March energy shock. Initially, the partial unwinding of that shock shaped the quarter, with periods of ceasefire optimism and then the signing of a memorandum of understanding between the United States and Iran helping to ease fears around the Strait of Hormuz, lower oil prices and restore risk appetite. Regional performance still diverged, with Asia Pacific emerging as the strongest major region, the United States also delivering a powerful recovery, and Europe lagging as its greater sensitivity to energy prices and weaker macro data continued to weigh on sentiment.
Outlook
In the United States, we are looking at businesses that could benefit from AI. These include health care and utility companies, which may gain from the growing demand for electricity needed to run AI systems. In Europe, we believe the region has the potential to improve its growth rate. This could be driven by increased competitiveness, more government spending in Germany and increased spending on defense. Elsewhere, companies that make computer chips in Taiwan and South Korea, electric vehicles and batteries in China and robots across Asia could benefit as big tech companies spend more money on AI and data centers. We also remain positive on Japanese stocks. Japan’s economy is returning to more normal conditions, and companies are making important changes to improve how they operate. These changes could help companies earn more money and generate better returns for investors.
Endnotes
- Source: European Central Bank.
- Source: “Winning US Bank Earnings Checklist 2025 — Decoding NII, Credit & CET1 Signals.” Quant77. October 13, 2025.
- Source: “Supervision and Regulation Report - December 2025.” Board of Governors of the Federal Reserve System.
- Sources: “ECB keeps capital requirements broadly steady for 2025, reflecting strong bank performance amid heightened geopolitical risks.” European Central Bank-Banking Supervision. December 17, 2024; “Basel IV isn't all bad news for European banks. “S&P Global. February 20, 2025.
- Sources: “Intesa Sanpaolo's EUR2 Billion Buyback: A Strategic Move or a Signal for European Banking Stocks?” AInvest. October 20, 2025; “The drivers of the 2025 surge in euro area banks’ market valuations.” European Central Bank. May 2026.
- Sources: “Improving valuations for Spanish and European banks.” Funcas. May 3, 2025; “European bank stocks have record year, lifting sector STOXX ETF assets above EUR 13bn.” STOXX. January 14, 2026; “The drivers of the 2025 surge in euro area banks’ market valuations.” European Central Bank. May 2026. European Central Bank.
- Sources: “IDC Says EMEA Digital Transformation Spending to Exceed $1,200 Billion by 2028, Driven by AI and Industry-Specific Investments.” IDC. January 29, 2025; “Worldwide Spending on Artificial Intelligence Forecast to Reach $632 Billion in 2028, According to a New IDC Spending Guide.” Business Wire release, August 19, 2024; “Global investment in AI to reach $632bn in 2028—IDC. Business Day. August 26, 2024.
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Equity securities are subject to price fluctuation and possible loss of principal.
To the extent a portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility.
Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
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