Gerd-Jan van Wiggen: Is the banking rally ‘too good to be true’ or ‘here to stay’?

September 22, 2026

_{This column was originally written in Dutch. This is an English translation.}

By Gerd-Jan van Wiggen, Partner at Probability & Partners

Fifteen years ago, whilst attending a banking conference, one of the participants remarked that investing in a bank was the same as donating to a charity: the benefits were social, but there was nothing in it for the investor.

The reasoning is understandable. The stricter capital requirements under Basel 3, the low-interest-rate policy and weak balance sheets with high levels of non-performing loans (NPLs), particularly in Southern Europe, have weighed on banks’ valuations for years.

Over the past five years, this picture has been reversed. The low interest margin and the capital requirements increased by Basel III have encouraged many banks to offer products that generate fee income without requiring much additional capital. In addition, interest rates have normalised since 2022, causing the interest margin to rise. Taken together, this has resulted in a healthy earnings picture for banks. This is reflected in the EURO STOXX Banks index below. Banks have performed well over the past five years, even when compared with many Big Tech companies.

The question currently on the minds of investors in banks is whether this trend will continue for a while longer or whether the picture will gradually shift. Banks are cyclical businesses, which makes it important to identify the next tipping point in good time. Personally, I look at the following factors:

• End of restructuring: a number of systemic banks underwent substantial restructuring in the years following the financial crisis. This led to various effects, including upgrades to the credit ratings of banks and the countries in which they are based. In Southern Europe in particular, we have seen a number of highly successful restructurings combined with sound national fiscal policy. The result has been cheaper funding and broader access to capital markets. Non-performing loans (NPLs) have also been removed from the balance sheets, giving banks greater scope once again to increase lending volumes and contribute to the economy. Examples such as UniCredit and Piraeus Bank demonstrate how this has played out. However, the bulk of the restructuring is now behind us, and the additional contribution to the performance of bank shares in a broader sense is diminishing.
• Interest rate trends: rising interest rates increase the net interest margin. However, if interest rates become too high in conjunction with a cooling economy, provisions and NPL ratios may start to rise again. As long as this remains manageable, it is not a problem, but for me this is an important indicator to keep an eye on.
• Efficiency: major remediation programmes such as AML/KYC and Return to Compliance for internal models (TRIM/IRB repair) have now largely been completed. This sometimes allows for a substantial reduction in the workforce, which naturally contributes to lower costs. As long as the new AML rules do not lead to a new wave of remediation over the next few years, this benefit will persist for some time yet. In addition, the simplification of legislation and regulations also plays a part in keeping costs down.
• AI: miracle or fairy tale? At present, I wouldn’t dare place AI in the ‘efficiency’ category. Banks, like other companies, are experimenting with AI applications. Some applications have been around for a long time, such as machine learning in transaction monitoring, and the added value of these is often clear. With newer applications that use large language models (LLMs), it is much harder to assess what they will actually deliver. In practice, I see many banks experimenting with tools, but the risk of errors and the consequences in the form of claims mean that implementation is proceeding only in small steps. I also see organisations that, after experimenting, come to the conclusion that hiring a junior staff member ultimately proves to be more cost-effective.
• Geopolitics: this factor is the most unpredictable and can affect business operations and a bank’s balance sheet in all sorts of ways. The rule here is: prevention is difficult, but the impact can be mitigated. A bank that takes this seriously gets a plus from me.

Taking everything into account, my conclusion is that the recovery is here to stay, albeit at a slower pace. The major catch-up phase is behind us: the restructuring is largely complete, the interest rate headwind from 2022 to 2024 has subsided, and most of the cost savings are already reflected in the figures.

In its May Financial Stability Review, the ECB concluded that valuations of banks in the eurozone have risen significantly to pre-financial crisis levels, but remain vulnerable to setbacks. According to its models, this is broadly in line with what the fundamentals justify, although valuations remain vulnerable to setbacks.

Banks are no longer a bargain. In the coming years, returns will stem less from revaluation and more from what banks actually earn and pay out, and the ECB expects these payouts to remain high for the time being. This means that the differences between individual banks are becoming more important than the sector as a whole: investors who focus on credit quality, cost discipline and geopolitical resilience will benefit more from stock picking than from index tracking. In any case, it is no longer a charitable cause.

More columns by Gerd-Jan van Wiggen