European banks have come a long way since the Global Financial Crisis (GFC). The worldwide turmoil almost two decades ago served as a wake-up call for lenders to shore up their capital and strengthen their balance sheets.
The Eurozone crisis that followed the GFC exposed the vulnerabilities of banks in countries including Ireland, Portugal, Spain, Greece and Cyprus, with the bailouts becoming a political hot potato. It was in this context Additional Tier 1 (AT1) bonds (also called CoCos) were created.
A type of hybrid instrument, AT1s were first sold in 2013 to boost the capital base of banks and contain a provision to absorb losses during stress events. AT1s have since grown to become a reliable segment for financing bank capital, with the outstanding global issuance now approximately half the size of euro-denominated high yield corporate bonds.
European banks have solid capital
CET 1 Ratio 2025 vs 2008
Over the past decade, European banks have weathered the adverse economic fallout from Covid-19 as well as the uncertainty from the collapse of Credit Suisse and meltdown of Silicon Valley Bank, which cast a shadow on US regional banks. The complete wipeout of Credit Suisse AT1s in 2023, even as equity holders- who usually rank below AT1 holders- were partially compensated, generated significant controversy and has spawned a host of legal challenges.
However, the European Banking Authority (EBA) as well as the Bank of England clarified that there should not be any read across for their jurisdictions, helping credit spreads to tighten.
Bank fundamentals were also supported by the monetary policy tightening cycle in 2022, as central banks battled soaring inflation caused by a combination of pent-up demand during Covid and supply chain issues. The rise in rates boosted interest income of banks as higher returns were passed on to lending rates, while the deposit rates remained low. Record profits, solid capital positions, low impairment levels and high interest-rate margins have all been favourable for banks’ equity as well as credit valuations.
The aggregated annualised return on equity for the EU banking sector has recovered significantly after slumping during Covid-19 and stood at 10.11% at the end of June 2025, according to the European Central Bank. The aggregate CET1 ratio of 16.12% is at the highest level since at least 2015.
As a result, while credit spreads on AT1s do appear tight from a historical perspective, the asset class continues to provide good spread and yield pick-up in comparison to generic non-financial BB-rated high yield bonds. Another factor why AT1s still remain an attractive asset class is that around 45% of the outstanding AT1s universe is rated BB or below, while they are mostly issued by banks with investment grade ratings.
One theme that has dominated the European banking sector in 2025 (gaining momentum since 2024) has been banking consolidation. After generous shareholder distributions, European banks have been prioritizing bolt-on acquisitions of complementary businesses both within national, as well as international borders. This further supported credit spreads especially for smaller profitable banks where M&A activity offers scale, capital growth and cost efficiencies.
In this regard, the European Commission and European Central Bank (ECB) have long held the view that banking sector consolidation will help create a more integrated EU banking Union given that there are credible business plans that aim to achieve cost synergies, creating both customer and shareholder value. However, this approach more often than not faces opposition from national governments and local trade unions worried about potential impacts on competition and jobs, especially if large banking groups are involved.
Moody’s, in a recent report, said banking system concentration has increased more quickly in countries such as Cyprus, Greece, Spain, Italy and Bulgaria that had faced severe financial difficulties due to the 2008 crisis and declined in France, Finland, Belgium and Sweden.
Banking system concentration has increased in Europe, but varies by country
Source: Moody’s Ratings and ECB
Focusing on some of the recent deals, France’s BPCE Group agreed to buy 100% of Portugal’s Novo banco for €6.4bn from Lone Star, a U.S. PE fund that bought 75% stake in the bank in 2017 after a state bailout in 2014. Italy’s UniCredit has progressively increased its stake in Greece’s fourth largest bank (by total assets) Alpha Bank to 26% from 9% in 2023. This continued interest has been welcomed by both Greek bank’s CEO and Greece’s Prime Minister and supported Alpha Bank’s credit spreads. Lastly, in August, France’s Credit Agricole raised its stake to around 20% in Banco BPM to become its largest shareholder.
In contrast, there have been certain takeover attempts which have faced multiple hurdles put in place by incumbent governments. In Spain, BBVA launched a €12bn takeover bid for Banco Sabadell in May 2024. The negotiations and deal approvals are still underway as both Sabadell’s board and the Spanish government are not in favour of the merger. The German Government has shown reluctance in allowing UniCredit to acquire Commerzbank, Germany’s second largest bank. UniCredit has built a substantial stake in Commerzbank over the past year. In Italy, government invoked its “golden power” law to impose harsh conditions on UniCredit’s bid for domestic peer Banco BPM to protect national security interests, post which the deal fell through.
Achieving synergies through consolidation
From our perspective, we favour consolidation among EU banks. As credit investors, however, it is crucial that any merger is ultimately capital accretive and avoids severe stress on capital ratios in the short-to-medium term. Also, the timelines of deal completion, details on potential cost savings and changes (if any) to the funding structure are equally important. A transaction that is drawn out with an unclear funding strategy creates uncertainty for credit spreads and can potentially disrupt the short-term strategy of a bank.
More generally, scale matters, especially in Europe where numerous small banks are still facing increasing IT costs and high regulatory costs. M&A can be the driving force to create larger, more efficient and fundamentally stronger Pan-European groups, which could further drive credit spreads towards the levels of their large US counterparties.
Strategy specific risks
Currency (FX) Risk - The Strategy can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
Share Class Hedging Risk - The share class hedging process can cause the value of investments to fall due to market movements, rebalancing considerations and, in extreme circumstances, default by the counterparty providing the hedging contract.
Interest Rate Risk - The Strategy can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates.e.g. the value of a bond tends to decrease when interest rates rise.
Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
Contingent convertible bonds - The Strategy may invest in contingent convertible bonds. These instruments may experience material losses based on certain trigger events. Specifically these triggers may result in a partial or total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.
Credit Risk - The issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due.
Market Concentration Risk (Sector) - Investing in a particular sector can cause the value of this investment to rise or fall more relative to investments whose focus is spread more evenly across sectors.
Derivative risk - the Strategy may use derivatives to generate returns and/or to reduce costs and the overall risk of the Strategy. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.
Liquidity Risk (general) - During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the Fund.
Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the Strategy's assets.
Sub investment grade bonds - The Strategy may invest a significant portion of its assets in securities which are those rated below investment grade by a credit rating agency. They are considered to have a greater risk of loss of capital or failing to meet their income payment obligations than higher rated investment grade bonds.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI.