JP Morgan has reaffirmed its overweight stance on European banks after a 7% sector decline in a month, naming Natwest and Standard Chartered among its top picks.
The US investment bank said the sell-off, driven largely by rising sovereign bond yields, had created a buying opportunity.
European banks are currently trading at 8.7 times forward price-to-earnings, implying a cost of equity of 11.5%, which JP Morgan argues is too high.
The bank previously targeted a cost of equity decline towards 9%, implying an exit price-to-earnings multiple of 11 times.
It has now reset that target modestly higher to 10%, reflecting the roughly one percentage point rise in sovereign yields, but said that still implied 15% upside from current levels.
JPM said European banks had never been in better shape from a capital, returns and risk absorption standpoint.
It expects earnings per share growth of around 12% per year across the sector between 2026 and 2028, in line with the long-run growth rate of US banks.
The sector's two-year forward price-to-earnings discount to the broader European market is back at minus 31%, in line with its long-term average.
JPM argued that discount is no longer justified given the improvement in sector fundamentals, adding that European banks should be trading at a premium to US regional lenders, which sit at 8.8 times 2028 earnings.
Natwest, the FTSE 100 high street bank, and Standard Chartered, the emerging markets-focused lender, sit alongside UBS, Deutsche Bank, ING and Julius Baer in JP Morgan's top picks portfolio.
Julius Baer, the Swiss private bank, has been added to the portfolio in the latest note.
The broker said the upcoming third-quarter earnings season should provide reassurance on the earnings trajectory for the sector.
