AI boom to supercharge European Banks' rally

London: After a stellar 2025, investors expect shares in European banks to keep heading higher in 2026, supported by strong earnings and, crucially, cost savings stemming from artificial intelligence. As fears of a recession and interest rate cuts from the European Central Bank have subsided, investors have turned even more positive towards European banks, revising up their expectations for the sector, despite a complicated backdrop.

Meanwhile, AI has emerged as a new force drawing investors to European lenders' shares, partly because a dearth of technology companies in the region has forced many to hunt for AI beneficiaries in old-economy markets. Banks have started to use AI to improve operational efficiency and fraud detection, as well as to reduce staff costs. "European banks could be a real beneficiary of AI," said Helen Jewell, chief investment officer for fundamental equities at BlackRock, the world's largest asset manager, with about $12 trillion under management. "A lot of the AI story has been focused on the revenue winners, but we also know that when it comes to AI, there is a beneficiary from the cost winners," she said at a press event. UBS said in a note to investors they see AI as a key source of potential upside to banks' near-term valuations and longer- term earnings. But that comes with risks.

Warnings over AI-related exuberance and the risks of a dot-com style bust have come from various sides, including the International Monetary Fund and the Bank of England. And risks aren't only AI-related. The ECB said euro zone banks face 'unprecedentedly high' risk of shocks including geopolitical tensions, shifting trade policies, climate-related crises and even a dollar squeeze for banks exposed to the volatile US currency.