European bank stocks enjoyed a stellar 2025, notching their best year since 1997, with the valuations of some lenders more than doubling. But the sector sold off heavily during the U.S-Iran conflict in March, calling an abrupt halt to three years of almost-linear positive returns. The Stoxx 600 Banks index is down 1% year-to-date, after falling by as much as 10% during the depths of the conflict. But Citi analysts believe the bull case for Europe's banks is set to continue, outlining their top three picks in a note published on Thursday. The analysts cited several reasons for the optimism; First, earnings per share estimates are still being upgraded. Citi put this down to a "superior" revenue outlook, but noted a number of banks that have also delivered better cost guidance. Analysts also see fears of disruption linked to conflict in the Middle East, as well as jitters around private credit, as "overblown." "We primarily attribute the sell-off post the Middle East conflict to positioning, more so than fundamental factors," they wrote. "The forward curve now points to two ECB hikes this year, [which is] supportive for earnings." The three names Citi is most confident in are HSBC , NatWest , and SocGen . The analysts also upgraded Lloyds to "buy" and Deutsche Bank to "neutral." European banks are sitting on excess capital, which Citi said could be deployed via buybacks, loan growth or M & A — though questions hover over the best route to achieve share price growth. "Banks also seem more willing to deploy capital in M & A and we expect this trend to continue, yet share price reactions have been mixed thus far," Citi wrote. But, Citi added, it sees "major obstacles" to a potential UniCredit/Commerzbank deal.
