Despite an interest rate cut expected this week, profits at a handful of major European banks will remain robust, according to Berenberg. The European Central Bank appears on course to cut interest rates this week, the first reduction since 2019, despite a higher-than-expected inflation print . The banks with the most significant upside potential to their share price — Standard Chartered , Barclays , Nordea Bank, UniCredit , and HSBC — have seen strong performance in recent years, and Berenberg analysts believe this trend will continue. Shares of all five banks are also traded in the U.S. extensively. Banks typically profit in a higher-rate environment. However, European banks underperformed their global peers over the past decade as the European Central Bank kept interest rates below or near zero until 2022. Peter Richardson, an analyst at Berenberg, pointed out that past experiences negatively influence investors' optimism. "Bank investors are cautiously optimistic. Despite the recent strong performance, the sector remains cheap, on 7.4x two-year forward [earnings per share forecast]," Richardson said in a note to clients on May 31. While banks have benefited from higher rates — a cyclical trend — much of the increase from negative and near-zero levels should be considered persistent, according to the German investment bank. "Moreover, the structural properties of many banks' balance sheets mean that benefits from higher long-term interest rates will continue to build even as central bank rates fall," Berenberg said. The investment bank's analyst also pointed out that European banks are currently trading at a 20% discount to their long-run average valuation despite improvements in their balance sheets and returns. According to Berenberg, historical data shows that European banks only traded below current valuations for 6% of the time between 1988 and 2020.
