Barclays’ latest note, dated Wednesday, concludes that European lenders should be able to withstand earnings pressure stemming from stagflation risks tied to the Middle East conflict. The bank’s analysts say the net benefit of higher rates will largely offset the impact of rising provisions, leaving industry earnings broadly manageable under a range of downside scenarios.
The research highlights that the European banking index SX7P has re-rated lower this year, with a 14% de-rating year-to-date and a 9% fall since the conflict began on Feb. 28. Barclays documents that the forward price-to-earnings multiple on the index has slipped from 11.2x at the start of the year to 9.6x as of April 2.
How rate moves and provisions balance out
Barclays’ earnings sensitivity analysis focuses on the interaction between rising deposit rates and potential increases in loan-loss provisions. The note finds that a cumulative 50 basis-point increase in interest rates lifts average bank pre-tax profit by roughly 3% in the first year. By contrast, a 10% increase in loan-loss provisions reduces average pre-tax profit by only about 1%.
Using those relationships, Barclays calculates that provisions would need to rise between 30% and 40% to eliminate the profit benefit from a 50 basis-point rate rise.
Scenario analysis
Barclays sets out a base downside scenario and a more severe stress case. In the base downside scenario the bank assumes:
- a 50 basis-point increase in interest rates;
- a 1% decline in loan growth;
- a 2% drop in fee income;
- a 30% jump in provisions.
Under those assumptions, median bank pre-tax profit would fall by about 5%, the note shows. In a harsher scenario in which provisions double and volumes weaken sharply, the hit could widen to around a 14% decline in median pre-tax profit.
Monetary policy and macro outcomes
Barclays’ economics team expects two 25 basis-point ECB rate hikes in April and June, which would take the deposit rate to 2.5% and leave it there through the end of 2027, according to the note. The bank also models an ECB severe scenario that assumes oil at $145 per barrel and gas at 106 euros per megawatt-hour; even under that stress, Barclays projects euro-area annual GDP growth of 0.4% in 2026 and 0.9% in 2027.
Shareholder returns and balance-sheet composition
Barclays points to shareholder distributions as an additional buffer for banks. The median European bank, the firm estimates, offers a cumulative yield of 26% over 2026-2028, comprised of roughly a 6% annual dividend yield and a 2% annual share buyback yield.
On the topic of private credit, a frequently cited vulnerability, Barclays reports that direct exposure across European banks is about 1% of loan books and is concentrated in the larger investment banks. The note highlights Deutsche Bank’s private credit holdings at 925.9 billion, equivalent to roughly 43% of tangible book value and the largest exposure among covered banks. By contrast, Santander’s private credit exposure is stated as less than 1% of its total lending, based on company disclosures cited by Barclays.
Positioning advice from Barclays
For investors considering portfolio tilts, Barclays sets out two potential positioning frameworks. In a defensive, escalation-related scenario, the bank identifies retailers or domestically focused lenders with rate sensitivity and low sovereign burdens as most resilient, naming AIB, Bank of Ireland, DNB, Danske Bank, CaixaBank and ABN Amro.
In a de-escalation, risk-on environment, Barclays flag Societe Generale, ABN Amro, UniCredit and Santander as those with the strongest rebound potential due to pronounced de-rating already factored into their valuations.
Recent market moves among covered names
Among the stocks covered in the note, Deutsche Bank has experienced the largest forward price-to-earnings decline year to date, down 22% on a forward P/E basis. Erste Group has fallen about 15%, while UBS, UniCredit and Standard Chartered are each down roughly 13%, Barclays reports.