European financials remain resilient after strong Q2 earnings

As we approach the end of the reporting season for European financials, including banks and insurers, Q2 2026 has proven to be another strong quarter, with most reported earnings coming in ahead of consensus and several banks upgrading their already ambitious profitability guidance for the year. Half-year (H1) results provide a clearer indication, than a single quarter of whether banks and insurers are on track to meet or beat their full-year guidance, as they smooth out quarterly volatility. The latest earnings suggest European financials remain firmly on course for 2026 guidance (and in some cases are ahead of it), with strong profitability momentum maintained despite periods of market volatility linked to geopolitical developments.

Starting with banks, the Euro Stoxx Banks Index (SX7E) continues to trade comfortably above 1x book value, with its price-to-book multiple rising to 1.57x as of August 2026 from 1.38x in December 2025, reflecting continued market confidence in banks’ ability to generate strong returns. Return on equity has also improved, rising to 13.24% as of August 2026 from 12.27% in December 2025, with consensus expecting a further increase to 13.42% by year-end. Also, bank equities remained broadly flat through the end of May, before rallying on the back of strong Q2 results, as earnings generally exceeded expectations and reinforced confidence in the sector’s profitability outlook (see Exhibit 1 below). Resilient fee and insurance income continues to support earnings, reinforcing our confidence that banks remain on track to deliver in line with consensus expectations.

If we take a closer look at earnings in detail, bottom line results for banks have been robust, with net interest income proving to be more resilient despite modest declines in policy rates. The resilience was a result of continued lending growth, deposit pricing discipline and continued support from the structural hedge. The European Central Bank’s decision to raise policy rates in June should provide some support to bank profitability over the coming quarters through wider deposit margins.

Despite ongoing geopolitical volatility, asset quality across European banks remains broadly resilient. Non-performing loan (NPL) ratios were stable or improved for most banks, while provisioning remained broadly in line with guidance. Credit costs have risen from exceptionally low levels following the Middle East conflict, with little evidence of any broad-based deterioration in credit quality. Areas of potential stress remain concentrated in familiar pockets, such as chemicals and software alongside energy-intensive sectors (basic industries, construction, and transportation) given elevated oil prices. But overall, these exposures remain contained at the sector level.

For UK banks, a new trend is emerging as net interest margins normalise, with lenders increasingly diversifying loan books towards higher-return segments. Large players are venturing deeper into first-time buyers, some building societies are entering professional buy-to-let lending, whilst specialised lenders are moving into development-type exposures. This should provide some earnings support in a declining rate environment, although with greater exposure to higher-risk lending. While we believe this move is manageable for now, given the very low starting point for these exposures, we recognise that such trends can take hold over the medium to long term. Therefore, it is important to monitor not just NPL ratios, which remain contained for a long time yet can move quickly in a downturn, but also the underlying risk profile of the banks. We expect this risk to remain controllable (not least because this growth has now been contained); however, given stronger underwriting standards and more disciplined risk management frameworks established since the financial crisis.

In addition, capital positions remain strong, providing comfortable buffers to return capital through share buybacks dividends and loan growth, while mergers and acquisitions activity remains supportive across Europe. At the same time, significant risk transfer transactions are increasingly being used by some banks to optimise risk-weighted assets and improve capital efficiency.  

Lastly, with the large insurers nearing the end of the reporting cycle, H1 2026 results were strong in terms of core earnings generation. Similar to banks, insurers remain on track to meet full-year targets, supported by strong investment yields. In property and casualty, pricing has begun to normalise in commercial insurance and reinsurance following several years of rate hikes, but there have been no outsized losses. Insurers are also diversifying earnings into Life & Health and asset management, where volumes, net inflows and assets under management remain healthy. Despite the summer wildfires in Europe, insurers have not flagged any material large-loss impact, with losses appearing broadly manageable. Against these strong fundamentals, spreads remain tight, reflecting robust earnings and capital strength, supported by strong Solvency II ratios.

Overall, we take comfort in our financial exposure given another solid set of results for the banking and insurance sectors. Despite the global macroeconomic backdrop, European financial earnings remain robust. While spreads remain tight, valuations still look relatively attractive compared with other credit markets, such as high yield, particularly given the ability to access investment-grade risk at high single-digit yields. Against this backdrop, we believe careful issuer and security selection remains key, with selective opportunities continuing to offer an attractive risk-reward.