Banco Santander's Shifting Valuation Dynamics in a Post-2025 Market

The valuation of Banco Santander has undergone significant shifts in the post-2025 period, reflecting both the bank's internal strategic adjustments and broader dynamics within the European banking sector. To assess whether these changes signal a deteriorating value proposition or the normalization of risk premiums, one must dissect the interplay between Santander's fundamentals and the macroeconomic forces reshaping European finance.

A Mixed Valuation Narrative

Banco Santander's valuation remains a subject of debate among analysts. On one hand, the Excess Returns model suggests the stock is undervalued by 17.1%, with an intrinsic value of €11.98 per share, driven by projected book value growth to €7.79 per share. Similarly, its Price-to-Earnings (PE) ratio of 11.41x trades at a modest discount to a fair ratio of 12.31x. On the other hand, alternative valuations argue the stock is overvalued by 7.5%, with a fair value of €9.53 compared to its closing price of €10.25. These divergent views highlight the tension between optimism about Santander's capital efficiency and caution over macroeconomic risks.

The bank's recent performance further complicates the narrative. After hitting a one-year high of $12.12 in January 2026, the stock has traded sideways, with analysts issuing mixed ratings ranging from "strong sell" to "strong buy". Despite this, Santander has maintained a robust dividend payout ratio of 25.30% and demonstrated year-on-year growth in revenue and net profit. These fundamentals suggest a resilient business model, yet the wide dispersion in price targets-from €5.8 to €9.5-reflects persistent uncertainty about its future earnings potential.

European Banking Sector: Resilience Amid Normalization

The broader European banking sector provides critical context for Santander's valuation shifts. Post-2025, the sector has experienced a strong rally, with European banks surging by +45.2% year-to-date through August 2025, outperforming both the broader European market and U.S. banks. This momentum is attributed to robust profitability, strong capital positions, and a resurgence in fee income. The European Central Bank's Financial Stability Review underscores the sector's resilience, noting that banks have weathered trade tensions and policy uncertainties while maintaining stable market functioning.

Risk premiums in the sector, however, remain under pressure from global uncertainties, including U.S. fiscal fragility and geopolitical tensions. Yet, the normalization of these premiums appears underway. The 2025 EU-wide stress tests confirmed that euro area banks are adequately capitalized to withstand severe shocks, bolstering investor confidence. For Santander, this normalization aligns with its strategic focus on risk management. The bank plans to offload €40–45 billion of risk-weighted assets in 2026 through significant risk transfers (SRTs), a move aimed at enhancing capital ratios and supporting growth. Such actions reflect a sector-wide trend of optimizing risk profiles amid evolving regulatory and economic conditions.

Correlation Between Santander's Valuation and Sector Trends

The normalization of risk premiums in European banking is closely tied to Santander's valuation dynamics. The bank's current PE ratio of 10.20x is modestly below its fair valuation of 11.59x, suggesting undervaluation relative to its fundamentals. Meanwhile, the sector's average valuation near 1.2x P/B, with potential for re-rating toward 1.4–1.5x P/B under favorable conditions, indicates that Santander's valuation may still offer upside. This aligns with broader macroeconomic normalization, as European banks benefit from stabilizing net interest margins and diversified revenue streams.

However, Santander's exposure to macroeconomic volatility in key markets like Brazil and Mexico, coupled with rising fintech competition, introduces risks that could pressure its margins. These challenges are not unique to Santander but reflect sector-wide vulnerabilities. The European banking sector's diversity-shaped by national influences-means that while some institutions may capitalize on regional opportunities, others face structural risks. Santander's strategic focus on capital efficiency and risk mitigation positions it to navigate these dynamics, but its valuation remains contingent on the pace of risk premium normalization.

Conclusion: Normalization, Not Deterioration

The shifting valuation of Banco Santander in a post-2025 market appears to reflect the normalization of risk premiums in European banking rather than a deteriorating value proposition. While the bank's valuation is subject to divergent analyst views, its strong capital position, strategic risk management, and alignment with sector-wide trends suggest resilience. The broader normalization of risk premiums, supported by robust profitability and regulatory confidence, provides a favorable backdrop for Santander's long-term value generation. Investors must, however, remain cautious about macroeconomic headwinds and competitive pressures, which could influence the pace of re-rating.