The strong correction of European banking stocks, triggered by the crisis in the Middle East, does not call into question the structural bullish trend of the sector. David Benamou, CIO of Axiom Alternative Investments, explains this by underlining that this recent volatility, moreover, is fueled by three distinct shocks: the first, linked to private debt, has been causing concern since last September, with the feeling that some risks are poorly managed; the second, related to artificial intelligence (AI), emerged earlier this year and concerns the risk of disruption to some activities, in particular deposit management via agentic AI; the third, of a geopolitical nature, is linked to the conflict in the Middle East and the temporary closure of the Strait of Hormuz.
The conflict in the Middle East, truce and consequences on oil prices
The recent conflict has caused a sharp increase in the price of oil, with Brent fluctuating between $103 and $120 depending on the session (and occasionally exceeding $109-110 in early April). For the ECB, this increase translated into greater inflationary pressures and rate expectations revised upwards. For European banks, the key element was the increase of around 40 basis points in the short-term part of the rate curve, which supports the net interest margin (NIM) through the limited remuneration of customer deposits.
Since the announcement of the two-week truce (which includes a conditional reopening of the Strait of Hormuz), Brent has seen a sharp decline, recently hovering around $92-96. This rapid de-escalation reduces short-term inflationary pressures and improves macroeconomic visibility, having already benefited banks’ trading and intermediation activities.
Central scenario involves an increase in rates
We consider as the central scenario (about 50% probability) the end of military operations, followed by an effective and safe reopening of the Strait of Hormuz in the coming weeks, through negotiations involving an international coalition (Europe, Gulf countries, etc.). Iran would maintain a central role by accepting transit guarantees in exchange for reconstruction aid and targeted easing of sanctions.
In this central scenario, the price of a barrel of Brent would stabilize between 85 and 105 dollars over the time horizon of one to three months. For European banks, the oil shock would remain temporary: headline inflation would progressively decrease, leaving the ECB some room for maneuver. However, we expect rates to rise in this scenario, which would support the sector’s net interest margin. The normalization of the situation could be accompanied by an increase in credit events. However, the cost of risk would remain low thanks to the reserves accumulated during the pandemic (around 20 basis points). Investment banks active in oil brokerage and market activities would benefit from increased trading and financing revenues.
Improving fundamentals and discounted valuations
Despite the recent volatility, the latest quarterly results from European credit institutions remain reassuring. Banks have solid fundamentals, with growth in loan and deposit volumes and revenues expected to increase by 3 to 10% in 2026 depending on the institution. Operational efficiency should continue to improve, particularly through lower cost-to-income ratios through acquisitions and artificial intelligence. BNP Paribas, for example, has revised its target upwards to less than 56% for 2028 (from around 58% previously).
The European banking sector’s discount remains sizeable (around 35-38% to the Stoxx 600 at current levels), offering an attractive entry point following the post-truce rebound. The main deterioration risk remains the cost of risk. We are not afraid that it will materialize in the short term, as long as the energy shock does not last long enough to cause rationing or a marked recession leading to business failures. The precautionary provisions accumulated by the pandemic – representing about 20 basis points of the cost of risk – provide a solid cushion.
