Morgan Stanley reinforces its bullish outlook on European banks as fourth-quarter earnings upgrades accelerate. Over 65% of the sector’s market cap has reported results, with 4% average pre-provision operating profit (PPOP) and profit before tax (PBT) beats, extending a streak of 28 consecutive quarters of PPOP outperformance. 73% of banks surpassed estimates, driven by robust net interest income (NII) and fee income. NII rose 2% sequentially in the eurozone, exceeding consensus by 3%, while fees jumped 8%, 2% above forecasts.

Despite mixed investment banking results, trading revenues held strong. Analysts noted costs remained aligned with expectations, partially offsetting profit gains. Consensus EPS for 2026-2027 rose 2% post-results, reflecting upgraded revenue and provision dynamics. Morgan Stanley dismissed deposit competition fears, citing stable pass-through rates and a healthier deposit mix, attributing trends to company-specific strategies rather than systemic issues.

Eurozone private-sector deposits grew 3% YoY, with 2.5% loan growth, and mortgage/corporate loan originations remained resilient, signaling sustained volume momentum. The sector trades at a 10.9x P/E and 34% discount to broader markets, with earnings revisions ranking among Europe’s strongest. Analysts reiterated an Attractive sector view, emphasizing banks’ improved fundamentals despite lingering skepticism.