European Banks Lag U.S. Rivals Despite 51% Stock Surge

European investment banking revenues face 12% quarterly decline while U.S. banks maintain market dominance in trading activity

Key Takeaways

• European banks set to underperform U.S. peers in Q2 despite strong American bank earnings, with Citi forecasting weaker sales and trading results due to regional variations and market share losses.
• Investment banking revenues projected to fall 10% to $7.5 billion for major Wall Street banks, while European investment banking revenues expected to drop 12% quarter-on-quarter despite 10% yearly growth.
• European banking stocks surge 51.59% in H1 2025 compared to 14.54% for U.S. banks, marking significant short-term outperformance driven by higher profits from recent rate hikes.

Introduction

European banks face mounting pressure to match the robust performance of their American counterparts as second-quarter earnings season unfolds. According to the Financial Times,  Major U.S. banks including JPMorgan Chase, Goldman Sachs, and Bank of America have delivered strong results driven by increased trading activity following recent market disruptions.

Citi analysts warn that solid U.S. banking results may not translate across the Atlantic, citing regional business mix differences and competitive headwinds. The performance gap emerges despite European banking stocks posting impressive gains of over 50% in the first half of 2025.

Key Developments

Second-quarter investment banking revenues for top U.S. banks grew 16% year-over-year to $42 billion, though they declined 6% from the previous quarter. Fixed income trading revenues increased 15% annually to $18 billion while equities trading jumped 24% to $15 billion.

The five major Wall Street banks are expected to see total trading revenue rise approximately 10% year-over-year to $31 billion. However, investment banking income faces a projected 10% decline to around $7.5 billion, with the segment’s share of total bank revenue remaining below 25% for the 14th consecutive quarter.

Citi has downgraded Barclays from “buy” to “neutral” following the bank’s share price surge of over 125% since late 2023. According to Fidelity International, only French banks BNP Paribas and Societe Generale are expected to report year-over-year increases, while Barclays, Deutsche Bank, and UBS face projected declines.

Market Impact

European banking stocks have delivered exceptional returns, gaining 51.59% in the first half of 2025 compared to 14.54% for U.S. banks. This outperformance reflects investor confidence in higher profits from recent interest rate hikes and robust capital distributions.

Net interest income for European banks grew 5% year-over-year in Q4 2024, though growth is expected to moderate to 1% in 2025 as rate cuts continue. First-quarter volatility boosted trading revenues, with equity trading up 31% year-over-year and fee income rising 9% for European banks versus 8% for U.S. institutions.

The strong stock performance contrasts with operational challenges, as European banks contend with weaker loan growth, narrower net interest margins, and increased regulatory costs. Provisions for loan losses have increased 13% year-over-year in Europe compared to 22% in the U.S.

Strategic Insights

European banks are prioritizing digital infrastructure investments and operational efficiency to maintain competitiveness. The focus on digitalization reflects recognition that technology adoption is essential for long-term sector health and resilience.

Wealth management has emerged as a key growth area, offering capital-light, high-return opportunities to diversify revenue streams. This strategic shift helps offset margin pressures in traditional lending businesses while capitalizing on growing demand for financial advisory services.

U.S. banks maintain advantages through sharper loan growth and wider net interest margins, benefiting from the Federal Reserve’s rapid rate increases. European institutions face headwinds from the European Central Bank’s aggressive rate hikes not fully translating into improved margins due to lagging loan repricing and heightened competition.

Expert Opinions and Data

Citi analysts note that U.S. banks’ returns signal “slightly worse results in sales and trading for European banks” due to unfavorable foreign-exchange translation and market share losses. They forecast European investment banking revenues to total $15 billion, marking a 10% annual increase but a 12% quarterly decline.

Morgan Stanley analysts express optimism about potential surprises in Q2 investment banking revenue, particularly strong underwriting and advisory fees. They highlight Goldman Sachs as a standout performer in the current environment.

TradingKey data reveals that while geopolitical tensions and interest rate uncertainty have enhanced trading performance, IPO activity and M&A deal flow remain subdued. Oppenheimer analysts mention that various economic shocks have deterred new deal and issuance activities.

Banking leaders emphasize that profitability, innovation, and digitalization are critical to navigating current challenges. The sector’s ability to adapt to regulatory changes and harness technology will determine competitiveness against U.S. peers as the regulatory landscape diverges.

Conclusion

European banks enter the second half of 2025 with strong stock performance but operational challenges that may limit earnings growth compared to U.S. peers. The sector’s impressive 51% stock gains reflect investor confidence in recent profitability improvements and capital strength.

However, structural headwinds including regulatory costs, competitive pressures, and slower loan growth create uncertainty about sustaining current performance levels. The divergence between stock market success and operational challenges underscores the importance of strategic execution in digital transformation and revenue diversification efforts.