Hello darkness my old friend Bank investing requires a thick skin and a steady hand. Once again in this 4-year banks bull market, we find ourselves examining a scare, concluding that fear creates opportunity. This report addresses common incoming questions, looks for odd dislocations, extracts the lasting lessons from Q2, and sifts through industry data for clues on H2. We remain bullish. The top-down We start with what''s spooking markets. Rate expectations are tumbling, but do not demand NIM downgrades. The economic recovery is sluggish, but banks are priced for recession. Credit spreads are widening, but don''t look menacing. Consumers are deleveraging, but via deposit growth which brings NII growth. Markets are down, VIX is up, suggesting lower market-reliant revenues, but only faintly. Meanwhile: as share prices fall, buyback potency rises. It''s not paradise, but banks in Europe, more than anywhere else, are priced for worse. Climbing the wall of worry will be powerfully positive. Bottom-up: the past The industry''s Q2 was notable for the breadth of earnings surprises, clearing a high bar, and the healthy generation and deployment of capital. Accidents were few and mild. The EPS upgrade cycle continues, a touch quicker than we''d expected. Bottom-up: the future The early signals from a falling rate environment are positive: deposit pricing is falling, deposit mix-shift is slowing (or reversing), credit demand is improving. Peak rates do not equate to peak EPS. Stock-selection, our top picks Our Top-down and Bottom-up convictions overlap in a host of retail banks with high profitability and generous capital return: Unicredit, Commerzbank, CaixaBank, AIB, Lloyds, BAWAG.