Don’t look now, but European banks are trading at two-year highs and could post significant further gains in years to come. These bank shares have been beaten up, and unlike their U.S. counterparts, who have rallied sharply in the past two years, European banks have yet to fully recover.

Most importantly, the overall environment for these banks, as well as their “internal” health has greatly improved.

From a macro basis, Europe has exited recession, unemployment although still high, is dropping; and the regulatory environment is also becoming friendlier (European parliament recently amended some rules relating to capital ratios, treatment of assets, etc.).

Five To Consider Now
The five largest banks in Europe in my view, represent a great investment opportunity for aggressive investors.

Deutsche Bank, UBS, Societe General (EPA:GLE), Credit Suisse Group (CS) and BNP (EPA:BNP) are all still trading significantly below their pre-crisis levels, and all have gone through significant deleveraging and as a result of this and other factors, now have higher capital ratios than previously thought and then needed.

Here’s why each shows potential.

Deutsche Bank: Aggressive deleveraging should help lift margins by some 3%, making shares as much as 40% undervalued compared to major U.S. banks.

UBS: The core business is improving, as is investment banking. Higher revenue expectations make shares as much as 35% undervalued compared to major U.S. banks.

Credit Suisse Group: The second largest Swiss bank has the highest excess capital of the five large banks mentioned, this has not been reflected in its share price. According to Barclay’s Capital, shares could double in the next few years.

Societe General: The bank could be the largest beneficiary of the recent parliamentary rule changes relating to the treatment of capital. More favorable treatment of capital will allow the bank to increase various activities that could increase revenues substantially.

BNP: Beleaguered and beaten, this is a pure value play as shares are trading near book value when accounting for increased capital.

Investing in these banks isn’t for the faint of heart or risk averse investors. But, if you’re looking for a long-term aggressive capital appreciation play, European Banks may be the opportunity of a lifetime.

Disclosure: The author and/or his firm may hold positions in all stocks mentioned.