Johnson notes that interest rate policy has broadly been supportive for European banks, especially after the ECB’s inflation-induced hiking ended at a high point of four per cent in late 2023. The subsequent cutting cycle over 2024 and 2025 has brought rates back to two per cent, giving these banks a profitable net interest margin and showing investors that there may still be room to cut.
European banks have also been beneficiaries of the ‘sell America’ trade that first took hold in April of 2025 as President Trump announced global tariffs. While that trade was somewhat short-lived as a prime market mover, there has been a push to invest marginal dollars in more value sectors and geographies outside the United States. European banks, Johnson says, have been an obvious place for that capital. This has been buoyed by greater fiscal stimulus in Europe, most noted by Germany’s removal of its debt ceiling.
While Europe is a deeply regional economic entity, and even the countries in the Eurozone are incredibly varied, Johnson notes that European financials tend to show less country-specific variation because of their connection to ECB rate policy. He highlights the fact that Société Générale in France, Commerzbank in Germany, and Santander in Spain all posted triple-digit gains last year, despite the variation between France, Germany, and Spain.
The macro environment and ongoing geopolitical uncertainty may continue to benefit European banks, Johnson says. The dismantling of a ‘rules-based international order’ in favour of regional spheres should prompt greater diversification on the part of Canadian and global investors. That diversification, he argues, should continue to seek out more value, especially as profit is taken from more recent success drivers such as large-cap US technology stocks. There is a great deal of uncertainty in the world, Johnson notes, and diversification can help offset that uncertainty, especially when it comes from the place of relative strength that most equity portfolios are in right now.
Johnson is cognizant of risks to the European banking sector, even as he articulates a bullish stance on it. The risk of a financial crisis, he notes, would be forecast by credit markets and credit markets for European banks are fine at the moment. Competition risk is mitigated by the scale and competitive moats of these banks. There may be some policy risk as the ECB navigates global changes, but Johnson notes that this will likely be beneficial for European banks as the ECB is more likely to cut rates in the face of geopolitical shocks. For advisors seeking stability and diversification, therefore, Johnson sees Europe’s banks as a play that can benefit.
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