Morgan Stanley turns cautious on European banks amid Middle East risks but backs Barclays and Lloyds.

Morgan Stanley has adopted a more cautious stance on European banks due to geopolitical uncertainty from the Middle East conflict, which may pressure sector valuations despite resilient earnings. The bank upgraded Santander to 'overweight' and kept Barclays and Lloyds as top UK picks, citing strong operating profits supported by higher savings rates and expected interest rate rises. Concerns remain over asset quality for banks with large corporate loan books amid potential disruptions to oil supply. European banks trade cheaply at around 8 times 2027 earnings, but a re-rating depends on clearer geopolitical developments or policy responses.