Morgan Stanley sees these stocks as good bet despite 17-year high

by Macarena Muñoz

Morgan Stanley analysts upgraded their view on European banks to attractive, saying that the sector has more upside even after rallying to a 17-year high.

“With risks to European growth receding, we gain conviction that yield steepening will hold and net interest income growth will resume in 2026,” analysts led by Alvaro Serrano wrote in a note. Despite the sector’s rally, banks only trade at nine times earnings — a 41% discount to the broader market — leaving “further room to re-rate,” they said.

The Stoxx 600 Banks Index has jumped 31% this year, making it the best-performing group in the benchmark. Lenders have benefited from strong earnings, hefty share buybacks and massive public spending plans that will probably keep interest rates high in Europe. Potential M&A in the sector has also helped.

Serrano said his team’s price targets for European banks imply upside of 15% on average, making the sector “an attractive option in a market where Morgan Stanley strategists see limited upside” of just 3%. The region’s lenders should be able to close the valuation gap with US peers, they wrote.

Morgan Stanley joins analysts from JPMorgan Chase & Co. and Goldman Sachs Group Inc., who are also bullish on European banks. The Morgan Stanley analysts highlighted Commerzbank AG, Lloyds Banking Group Plc, Banco Santander SA and Societe Generale SA as their top picks.

ABN Amro Bank NV, AIB Group Plc and Bank of Ireland Group Plc were all upgraded to equalweight from underweight as part of Wednesday’s report. Morgan Stanley strategists also upgraded their view on European banks to overweight.

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