2 Major European Bank Stocks Have Thumped the S&P 500 Index This Year. They Still Trade at Less Than 65 Cents on the Dollar

It's been a wild year for the benchmark S&P 500 (SNPINDEX: ^GSPC). The index started the year on a high note and then got crushed, mainly due to concerns about U.S. President Donald Trump's tariffs. The index fell nearly 20% from highs seen in late February, but then battled back once Trump announced a 90-day pause on implementing the higher tariffs. It has since recouped most of its losses.

The S&P 500 was only down about 4% (as of May 8), which isn't so bad, all things considered, although it could also suggest that the market isn't fully reflecting potential struggles ahead. That said, difficulties in one market open opportunities in others. Two major European bank stocks have thumped the S&P 500 this year, and they still trade relatively inexpensively.

1. Barclays -- up 23% this year

Shares of the large British bank Barclays (NYSE: BCS) have risen nearly 23% this year. During the past year, Barclays is up 54%. European banks have not fared well since the Great Recession, especially compared to their U.S. counterparts. They have struggled due to a combination of extremely low interest rates, weak gross domestic product (GDP) growth, and heightened regulation. Interest rates in Europe were negative for a number of years, making it very difficult to profit under the traditional bank model, which involves borrowing money at low short-term rates and lending it out at higher longer-term rates.

Image source: Getty Images.

Banks are largely seen as a reflection of the economies in which they operate. With the U.S. seemingly shutting its doors to many of its trading partners, many expect Europe will invest more in its own economy, which could lead to faster GDP growth. The Eurozone only saw GDP grow by about 0.9% in 2024. In 2025, economists at S&P Global expect to see a similar year of 0.9% growth before GDP increases to 1.4% in 2026. Although not exactly spectacular, it is an improvement, and investors may have more confidence due to potential increased military spending in Europe.

The other thing to consider is that Barclays and several other E.U. banks have improved returns for several years now, although they've largely been ignored due to U.S. exceptionalism and the economic struggles mentioned above. In the first quarter of 2025, Barclays generated a 14% return on tangible equity (ROTE), up from 12.3% one year prior.

The increase can be attributed to outperformance in investment banking and Barclays' private bank and wealth management division. Intense volatility in the markets can juice profits at bank trading desks. However, Barclays' U.S. consumer bank also underperformed management's expectations in Q1.

Ultimately, management thinks the company can generate an 11% ROTE in 2025. Capital levels are also elevated, setting the stage for capital distributions, including share repurchases. Barclays also currently has a nice dividend yield of roughly 2.7%. While it doesn't always work out, banks that consistently generate a 10% ROTE typically receive a valuation of 100% of tangible book value (TBV), where the stock's market capitalization equals tangible shareholders equity. Barclays stock still trades well below TBV per share, leaving plenty of long-term upside if management can continue to execute.

BCS Price to Tangible Book Value data by YCharts.

2. Deutsche Bank -- up 56% this year

Not only has Deutsche Bank (NYSE: DB) been dealing with economic challenges similar to Barclays', it's been dealing with numerous regulatory issues related to anti-money-laundering (AML) infractions.

The bank has paid hundreds of millions in fines associated with these charges and for not correcting its AML infrastructure quickly enough. As recently as 2023, Deutsche Bank paid $186 million in fines. But Germany's largest bank has made some progress in this department as well. At the end of last year, the German regulator BaFin recalled one of its special monitors that had been placed at the bank to ensure compliance with AML remedies.

While regulatory work remains, Deutsche Bank has made strong financial progress. Management has lowered costs and reduced risk-weighted assets such as loans in order to become more capital-efficient. Revenue has also increased at a compound annual growth rate of 6.1% since 2021, which is within management's targets. Additionally, Deutsche Bank delivered an 11.9% ROTE in the first quarter of 2025, which is up from 7.4% in Q1 2024.

Although the bank seems to be benefitting now from a strong performance in investment banking, a division that can experience rapid swings in revenue and profitability, management is still confident in its ability to surpass a 10% ROTE in 2025.

Capital levels at the bank are high. Management has also proposed spending 750 million euros ($842 million) on share repurchases, which, coupled with the dividend, brought total distributions to 2.1 billion euros in the quarter. Management thinks it can outperform the annual 8-billion-euro distribution target. Deutsche Bank is another stock trading at pennies on the dollar. That also makes stock repurchases very accretive to increasing the bank's TBV, which should help the stock over time.

DB Price to Tangible Book Value data by YCharts.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.