Investment Rating - The industry view for European banks has been raised to Attractive from In-Line [8][30][31] Core Insights - With risks to European growth receding, there is increased confidence that yield steepening will hold and net interest income (NII) growth will resume in 2026 [1][2][32] - The report estimates a 10% compound annual growth rate (CAGR) for earnings per share (EPS) from 2024 to 2027, which is not currently reflected in the 9x price-to-earnings (P/E) ratio [1][3][30] - The sector is expected to experience a trough in NII in the second half of 2025, followed by a 3-4% growth starting in 2026, with potential upside if loan growth accelerates [3][6][30] Summary by Sections Economic Outlook - Post US-China de-escalation, risks to European growth have diminished, leading to a maintained assumption of 1.5% ECB rates, with expectations of 25-50 basis points higher steepening than previously estimated [2][14][32] Earnings and Valuation - The report indicates that the sector is trading at the lower end of the historical P/E range of 8-13x, despite improved cost efficiency, lower credit risk, and less leverage compared to pre-global financial crisis (GFC) levels [4][30] - The average price targets imply an 18% upside for Euro Area and UK banks, compared to a mere 3% upside for the wider market [5][30] Strategic Recommendations - The report highlights a preference for longer duration/high deposit beta names, with upgrades for AIB and BOI to Equal-weight, and ABN also upgraded to Equal-weight [6][31][37] - Top picks include Commerzbank, Lloyds, Santander, and Soc Gen, reflecting a strategic focus on banks with better growth prospects [6][9][31]