UBS has maintained its constructive view on the European banking sector as it approaches 2026, keeping Barclays PLC on its roster of preferred buy-rated stocks. The broker argues that the fundamental environment for banks remains favourable and contends that markets continue to undervalue the transformative potential of artificial intelligence within the sector.
The Swiss banking group characterised 2025 as a robust year for European banks, noting that earnings forecasts were revised upwards by 10 per cent whilst dividend distributions and share buyback programmes pushed total yields to 9 per cent. Valuation multiples expanded by more than two price-to-earnings points over the period. Despite this re-rating, UBS maintains that the sector trades at an attractive level of approximately 8.8 times anticipated 2027 earnings, representing a 35 per cent discount to the broader equity market.
The broker projects earnings growth of 8 to 9 per cent for both 2025 and 2026, accelerating to 11 per cent in 2027. UBS suggests that 2026 may prove to be a pivotal year as investors reassess the impact of artificial intelligence on financial services operations. The firm cited emerging evidence of shifts in recruitment patterns at advisory and professional services firms as an early indicator of technological disruption.
UBS posits that comprehensive digitalisation could ultimately reduce bank operating costs by 15 to 20 per cent. Based on its modelling, such efficiency gains could translate into approximately 20 per cent higher pre-tax profits. The broker anticipates that this thematic consideration will assume greater prominence as market participants debate the appropriate valuation premium to assign to such operational improvements.
Within the UK market, Barclays retains its position as a preferred holding. UBS emphasised the bank’s execution against its strategic objectives, improving returns on equity and what it characterises as an attractive earnings growth trajectory extending through 2027. Standard Chartered has been removed from the top picks list following a strong performance period, though the broker maintains its buy rating on the stock.
UBS also highlighted the potential for corporate activity to provide additional value creation opportunities. Banks continued to divest non-core assets throughout 2025 whilst simultaneously acquiring scale in growth areas such as digital banking and deposit-gathering platforms. Robust capital generation is affording management teams increased strategic flexibility. The broker expects merger and acquisition activity to contribute positively to earnings in coming years, representing upside that it believes is not fully reflected in current valuations.
