How are macroeconomic factors affecting the banking sector?
Gerard Cassidy: The underlying fundamentals in the U.S. banking industry remain very healthy and resilient. Consumer spending, capital expenditures by U.S. corporates, and the strength in real GDP all bode well for the outlook in 2026.
The risk to this outlook, of course, is hostilities in the Middle East. An intense conflict through the end of the year and oil prices of over $150 a barrel would weigh heavily on the bank stocks, as the U.S. economy would likely falter.
Anke Reingen: European banks face similar trends. The higher energy prices triggered by the war affect Europe more.
We have higher rates, but also a flatter yield curve and wider credit spreads. While the fundamentals remain very strong, what we really need to see is improving business and consumer confidence, and these have been lagging recently.
Are banks still attractive to investors?
Reingen: Banks historically suffer during geopolitical shocks. However, they're performing well now because they've been tested by recent crises and their capital positions are stronger.
Because valuations are not super cheap, the key is to be selective. Simpler business models with identifiable value drivers are preferred.
Cassidy: Regional banks continue to play out favorably in this volatile environment. The smaller regional banks are up on average by around 8.6% year to date, compared to 1.9% for larger banks and 3.4% for the S&P 500.
Banks in general should benefit from a steep yield curve, increased loan demand, and very strong capital and liquidity positions. This assumes that the conflict in the Middle East is resolved sooner rather than later, and that inflation is contained.
"The smaller regional banks are up on average by around 8.6% year to date, compared to 1.9% for larger banks."
Gerard Cassidy, Co-Head of Global Financials Research, Large Cap Banks Analyst
What are the most important growth drivers for the sector?
Reingen: The speed at which AI has moved front and center is astonishing. It's moved from an opportunity to a threat for some parts of the businesses, but we still think it should be a net benefit in the form of cost savings or revenue opportunities.
Another theme that has gained momentum is stablecoins. This could also be an opportunity for the banks, but clearly, it's a space that's very much in the focus of the regulators.
Cassidy: We expect the consolidation of the industry to continue. This administration is very supportive, and we anticipate that we'll see more deals done over the next 18 to 24 months, as bankers look to build scale.
The overall credit outlook is one of resiliency. There has been increased concern over loans to non-depository financial institutions (NDFIs) because of the issues in the private credit sector. The banks appear to have structured these loans in a less risky fashion, but it's an area of potential stress.
What's the impact of the current regulatory approach?
Cassidy: The U.S. regulatory environment has changed dramatically under the current administration. Regulators are focused on credit quality, capital and liquidity, and they plan to provide capital relief to nearly all the top 20 banks in the U.S.
The excess capital will be used, of course, to grow balance sheets, but also to pay dividends, to make acquisitions, and to buy back stock.
Reingen: The changes in the U.S. have led to some softening by European regulators as well. There are certainly concerns that a divergence could lead to competitive disadvantage for the European banks.
"The changes in the U.S. have led to some softening by European regulators – there are certainly concerns that a divergence could lead to competitive disadvantage."
Anke Reingen, Co-Head of Global Financials Research, European Banks Analyst
What's the state of lending volume and where is growth coming from?
Cassidy: Loan growth accelerated in the first quarter. The main factor was commercial loan growth, supported by U.S. tax law changes, which allow U.S. corporates to make capital expenditures and expense 100% of that expenditure in year one.
Robust datacenter buildout is impacting loan growth too. We're also seeing growth in the investment banking area of the portfolio, where many large banks are supporting their customers with repo financing as well as acquisition financing.
Reingen: In Europe we had really strong loan growth on improving household financials, low unemployment, declining interest rates, and higher house prices. There was pickup in corporate loan demand, but recently there are concerns that declining confidence has dampened investment.
How are investment banks positioned?
Reingen: Q1 results showed growth in U.S. investment banks' balance sheets. This could be a sign of U.S. banks investing more into their capital markets business because of softer regulation.
Cassidy: If the volatility dies down, we could see a reemergence of the equity capital markets business, with some very large IPOs.
Industries know that this administration obviously ends at the end of '28, so there's a two to two- and-a-half-year window of real opportunity for consolidation. The investment banks and their advisory businesses are the likely beneficiaries.
