Will US banks be overshadowed by European peers in 2024?

Undervalued European lenders may be heading for a stellar year.

Europe’s undervalued banks are set for their best-ever year against American rivals after souring debts and regulatory concerns halted U.S. lenders’ record-breaking end to 2023.

The KBW Bank Index, comprising the top 24 US banks, jumped 30% in November and December — its best final two months of a year according to data compiled by Bloomberg going back to 1991.

This year it’s expected to return less than 1%, according to Jan. 1 analyst price targets compiled by Bloomberg, while Europe’s Stoxx 600 Bank Index is projected to return more than 22%, which would be its second-best year since 2012.

The 21 percentage-point gap is the widest in expected returns for the start of a year since at least 2005, when Bloomberg began recording price targets, and comes as American banks are poised to release fourth-quarter earnings this week.

Analysts see European banks as undervalued and therefore playing catch-up this year. Consensus is growing that the Bank of England and European Central Bank will cut rates in the second quarter, removing an overhang driven by uncertainty, while strong earnings are expected — the index’s average return on equity, a key profitability measure, is at its highest since 2007.

In the U.S., while JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. posted record profits in the third quarter, lenders are struggling with slowing loan growth, more regulatory oversight following last year’s regional bank crisis, and concerns debt defaults will rise and lead to higher write-offs. Despite its record end-of-year run, the KBW Index remains about 34% lower than its January 2022 high.

Of the 46 banks in Europe’s Stoxx 600 Bank Index, 32 are expected to post a double-digit stock return this year, while 24 are seen breaking 20%. Of the 24 banks in the KBW Index, only M&T Bank Corp. is expected to return at least 10%.

“The wild card is credit,” Christopher McGratty, managing director of US bank research at Keefe Bruyette & Woods, said in an interview. While “rates coming down really takes some of the acute pressure off of credit concerns,” he expects more U.S. debts will go unpaid.

Analysts cut their 2024 profit predictions for U.S. banks by 16% last year, with no notable improvement even as the Fed signaled rate cuts are likely. European banks’ earnings projections were boosted 37% over the same period.

“I’m more cautious this year than I have been,” Wedbush Managing Director of Equity Research David Chiaverini said in an interview. “I feel as if the hangover from all the stimulus from Covid hasn’t been fully felt yet, and that’s what makes me more guarded right now.”

The KBW Index returned 5.3% per year on average over the past decade, compared with the Stoxx 600 Bank Index’s 0.2% annualized return.

JPMorgan, Bank of America Corp., Citigroup and Wells Fargo are scheduled to kick off the reporting season Friday.