Last checked at 
STOXX Europe 600 banks index highest since Oct. 2015
*
Higher rates have helped fuel year-long banking rebound
*
Earnings from NatWest, Deutsche, Barclays fuel rally
LONDON, April 26 (Reuters) - European banking stocks hit their highest level since 2015 on Friday, helped by first-quarter earnings that beat forecasts and signalled lenders remained in a "sweet spot".
The basket of STOXX Europe 600 banks touched 197.7, a level last reached in October 2015, aided by a 5.9% jump in the shares of NatWest after the British bank's first-quarter results.
The index has gained 16.7% this year, outpacing a 6.1% rise in the pan-European STOXX 600 and outperforming U.S. banking shares.
European bank stocks have been on a tear since they tanked in March 2023 amid the U.S. banking crisis and the collapse of Credit Suisse.
The milestone on Friday marks a significant turnaround for a sector that has struggled since the 2008 global financial crisis from weak profitability, regulatory scandals and a trend that has seen Wall Street firms take market share in investment banking.
Higher interest rates since 2022 have been a game changer, boosting lenders' bottom line and generating windfalls that many have given straight back to shareholders - further fuelling their stock prices.
"They (bank shares) were very cheap for a long time ... what we're now getting from the banks is less bad news, or maybe even slightly better news, in that we haven't had that recession, we may be getting interest rate cuts, and net margins are more plump than they were on their loan book," said Russ Mould, investment director at AJ Bell.
"They're in a relatively sweet spot," he added.
European banking shares remain way off their 2007 pre-crisis highs, however, when the index traded above 530, and would need to rise around 20% to return to late 2009 levels.
Expectations that central banks will soon reduce rates have raised concerns about profits, but recent earnings suggest many lenders remain in reasonably good health with limited bad loan provisioning and margins, while falling, still healthy.
NatWest earnings topped expectations on Friday.
That followed forecast-beating results from Deutsche Bank , whose shares leapt more than 8% on Thursday, and a relatively strong showing from Barclays. The euro zone's largest lender, BNP Paribas, reported a drop in revenues but a bigger reduction in costs.
Risks remain, not least if economies weaken rapidly, creating bad loans. Competition among lenders for savings and mortgage products also remains fierce, keeping a lid on margins.
Still, there are signs investors who ditched banks after they axed dividends during the pandemic may be returning, lured in part by a record 120 billion euros of dividends and share buybacks lenders are expected to hand out this year.
"As the banks edge higher they are becoming again more important in the indexes so not being involved starts to become problematic for investors and funds performance," said Michael Christodoulou, analyst at Berenberg.
