This global crisis hasn’t knocked banks off course | Transcript

Joe Coletti

Welcome back to Strategic Alternatives, the RBC Capital Markets podcast. I'm your host for this episode, Joe Coletti. Today, I'm joined by our Co-Heads of Global Financials Research, Gerard Cassidy and Anke Reingen. Gerard is also our U.S. Large Cap Banks Analyst, and Anke, our European Banks Analyst. Gerard. Anke, welcome and thank you both for being here.

Gerard Cassidy

Thank you.

Anke Reingen

Thank you for having us.

Joe Coletti

We're recording this podcast on April 20, and today, we're going to discuss the key themes shaping the global banking sector right now: macro conditions and what they mean for fundamentals and market performance, the regulatory reset and what it unlocks, capital markets activity and the long-term structural shifts around AI and private credit across both the U.S. and Europe.

Gerard, let's start with you. Banks enter 2026 from a position of strength: solid earnings, strong credit and resilient balance sheets; but the signals underneath are becoming more uneven. How would you characterize the macro environment right now, and how are these crosscurrents showing up in fundamentals across both the U.S. and Europe?

Gerard Cassidy

The underlying fundamentals in the U.S. banking industry remain very healthy and resilient. We are in the middle of our first quarter earnings season, and the results that we've seen so far have been in line to better than expected. And as a result, the U.S. economy, when you look at the underlying trends, whether it's consumer spending, capital expenditures by U.S. corporates, as well as the strength in real GDP, it bodes well for the outlook in 2026 for the U.S. banks. The large unknown and risk to this outlook, of course, is the outcome of what's going on in the Middle East, and how long the price of oil remains very elevated. Should we see this conflict remain intense through the end of the year and the price of oil eventually reaching over $150 a barrel, that would weigh heavily on the bank stocks, as the U.S. economy would likely falter in that kind of environment. But as we are looking at it today, based upon the outlooks that the banks gave us last week when they reported their results, as well as the macro readings that we see, it still remains to be a healthy, robust outlook for the American banks, as they continue to grow with the U.S. economy.

Anke Reingen

We have quite similar trends in Europe. Obviously we started the year with an outlook of an improving economic environment, with strong company fundamentals, but then we had the escalation of the conflict in the Middle East, which has been leading to higher energy prices, and these affect Europe more. We have higher rates, but also a flatter yield curve and wider credit spreads. None of this is conducive for the banks overall, but in the first quarter, fundamentals are likely to still be very strong, but the focus will be on the outlook comments. But clearly it is very uncertain. The market indicators, yeah, move around, but I think what we really need to see is as well improving business and consumer confidence, and that's been lagging recently; and that's the trigger for clients to transact, to lend and invest, and that will depend on how the environment will develop.

Joe Coletti

So, we've seen a lot of volatility across equity markets this year. How are banks holding up relative to the broader market, and is the sector still attractive for investors? Who are the winners in this higher volatility environment?

Gerard Cassidy

Increased volatility in equity prices, of course, benefits the large cap banks that have large trading operations. When we look at the bank performance year to date, the smaller regional banks, on average, using the KRE as the index, are up around 8.6% year to date. The larger banks, as measured by the BKX, they're up about 1.9%. Now this compares to the S&P500, which is up 3.4% or the NASDAQ, which is up around four and a half percent. So, the regional banks are outperforming the markets. But we would point out that the banks in general, assuming the conflict in the Middle East is resolved sooner than later, the entire group should benefit from the underlying fundamentals, which include a very steep yield curve, as well as increased loan demand, as well as very strong capital and liquidity positions. And this all bodes well for the underlying fundamentals for the United States' banks. That all being said that could change if inflation is not contained and it forces the Federal Reserve to pivot later this year or early next year on fighting inflation through monetary policy, such as raising short-term interest rates.

Anke Reingen

Yeah, I think it's quite interesting to see, like historically, obviously the banks during periods of economic and geopolitical shocks, they've done worse than the market, but this time and probably last year, we could see that they're actually performing in line, and I think that's probably because they have been tested with a few crises. The capital positions are much stronger and the fundamentals, relatively strong. Overall, I think probably the valuations they have come back, but because they're not super cheap, I think the key is to be a bit somewhat selective. I think simpler models and stories are preferred, likely with a bit of interest rate gearing, although obviously there is some volatility. But I think it's clearly the fact, similar to the regional banks, where the business models are somewhat less complex, easier to follow with more identifiable value drivers.

Gerard Cassidy

And as a follow up to Anke's comments about the European banks being tested. That's a very good point, because we have seen that here in the U.S. as well, especially when you think about how the banks performed during the pandemic, and more importantly, how their commercial customers navigated through that pandemic has made them more resilient, more efficient, better able to handle volatility, like we're seeing from the conflict in the Middle East, and that's showing up in the numbers, in terms of the resiliency and credit quality.

Joe Coletti

Let's start with you on this one, Anke. How do you think about the long-term structural backdrop for the sector, and what are the growth drivers that investors seem to be most focused on right now?

Anke Reingen

The speed at which AI has moved front and center is astonishing. It moved from an opportunity to a threat for some parts of the businesses, but we still think net-net, it should be a benefit for the financial institutions. If this is in form of cost savings, revenue opportunities, or how this is going to be split between banks and customers, remains to be seen, and probably depends on the bank's engagement. But clearly AI is top. Another theme it has gained momentum is stable coins, especially since U.S. passed at the GENIUS Act. There's so many initiatives it's affecting, could be affecting banks in various forms, but it could also be an opportunity for the banks. But clearly, it's a space that's very much in focus of the regulators, given liquidity and funding will be affected.

Gerard Cassidy

Consolidation continues to be a very strong structural backdrop for the industry, and we expect the consolidation of the industry to continue, especially with this administration. 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, to operate more efficiently and more profitably. And as Anke pointed out, the AI build-out is for real. We look at it more as a way for banks to improve their profitability, rather than a pure cost reduction strategy where implementing AI will replace humans. Certainly there'll be some of that. But as a general outlook, we look at it as more of making the companies more productive and more profitable. The other backdrop piece is on credit, which is loans to non-depository financial institutions known as NDFIs. These are financial institutions that are not banks, that lend money out to their customers. Banks have grown this portfolio very rapidly. This is where the private credit borrowers sit on a bank's balance sheet. This is an area that has seen an increase in attention and concern because of some of the issues that are now sprouting up in the private credit sector. It's an area we're watching carefully. The banks appear to have structured these loans in a less risky fashion, but it's always something to watch out for in the next credit cycle as being an area of potential stress. So overall, when you look at the structural pieces to the banking industry, the industry has always been very competitive. It's been competitive with the non-banking sector, and that remains to be the case today.

Joe Coletti

Gerard, credit quality has been one of the standout positives in the current cycle, benign across the industry, and as you've noted, reminiscent of the mid 1990s in terms of the backdrop it provides for earnings growth. How durable is that? And what are the watch items heading into the back half of this year?

Gerard Cassidy

There's nothing more important in determining the valuation and the stock prices of banks than credit quality. Single handedly, it can destroy earnings very quickly and in a recovery mode, it can lead to the recovery of earnings as well. Today, credit and the credit outlook is one of resiliency. The U.S. banking industry's credit quality is very healthy, even though, as we touched on a moment ago, the loans to the NDFI sector is an area of risk. However, I would say there hasn't been any changes in the current status of the NDFI loan portfolios. What we're watching carefully are the areas such as C&I, commercial and industrial lending, that is always something that can be volatile, should the economy go into a real slow down or into a recession. Commercial real estate markets in the United States have been under quite a bit of stress, particularly the office markets in our major cities, and the portfolios have come under stress as well. It appears that we're bottoming in this area. The industry has been very fortunate to have had a number of years post the pandemic where credit has been benign, and we think that's going to be the case as we go forward. And one of the interesting aspects of credit quality is that when you run into credit problems in the down leg of a credit cycle, which are associated with a recession, you normally need to see rapid loan growth precede the credit cycle, and because the banking industry has not seen rapid loan growth right now, the credit outlook again remains benign. Now that could change in 18 months. We see loan growth in the first quarter obviously picking up. And I think when you go forward, if rapid loan growth comes back for the industry for a 12 to 18 month time period, then we would certainly be more concerned about credit in the second half of '27 and going into 2028.

Anke Reingen

The key thing for us is just going into Q2 will be, if banks are deciding to take general provisions or top-level adjustments, given the deterioration in environment, I guess if you look at the retail side, unemployment is the key driver, and there's very little change, so that's probably going to be resilient. I think on the corporate side, we might see some provisioning top-up for either direct exposure into the regions or because of a deterioration in economic outlook. Commercial real estate, some of the stocks in our coverage have exposure to the U.S. or to Europe. That could also be a feature. And I think probably we try to get a grip on the exposures to private credit, non-ban financials, to get a better view in terms of the outlook. But I agree it's overriding, and the uncertainty adds an additional overhang in terms of the forecasting space on that line.

Joe Coletti

Gerard, I want to turn to you and talk about the regulatory environment, which has arguably never been more explicitly pro-bank. How does that translate into capital return, consolidation, and ultimately the competitive environment across the sector?

Gerard Cassidy

The U.S. regulatory environment has changed dramatically under the current administration versus the prior administration. The regulators have all been replaced with pro-bank regulators. They're not bureaucrats, they're folks that have actually worked in the banking industry, and they're taking a much more practical approach to bank regulation. They're focused on credit quality, capital, and liquidity. Those are the three stress points in any banking industry, and that's what the regulators want to ensure are very strong in the United States. With that as a backdrop, they have eased up on a number of requirements, particularly when it comes around to capital ratios. The industry is very well capitalized since the financial crisis in '08, '09, and what is happening is that the regulators, led by the Federal Reserve has issued their Basel III End Game proposal, which came out last month. And this proposal is going to loosen the corset, if you will, as the treasury secretary would like to call it, on bank regulation, and they're doing it to enable the banks to engage in more active lending into the U.S. economy. And so, as a result, we're expecting the banking industry's capital relief to range anywhere from a low of three or 4% to a high of nine to 10% in terms of their capital ratios, being able to decline by that amount. So, to us, what we're seeing is that, as a result of this, the excess capital will be used, of course, to grow their balance sheet. That's the number one choice. But number two, they'll also use it to pay dividends. Number three, they'll use it to possibly do acquisitions, and lastly, buy back their stock. And so share repurchases, which have been very active for the last 10 years, will remain very active, and even become more active, as we see the final proposal codified, which we expect to happen later this year, probably in the fourth quarter. So the outlook for us from a regulatory standpoint, is a more reasonable regulatory environment that focuses on those three key points of credit quality, liquidity, and capital to ensure that the U.S. banking industry remains very resilient in a downturn.

Anke Reingen

The changes in the U.S., they have led to some softening by European regulators as well, and importantly, especially in continental Europe, have sort of like supported that headwinds are coming to an end. There's certainly a sense that some easing should lead to the banks lending to the economy, rather than this all being used for distributions. And another area of focus has been the softening of rules in the trading area. And there are certainly concerns that a divergence could lead to an arbitrage or competitive disadvantage of the European banks. And there's a sense that if Europe moves ahead with a fundamental review of the trading Book, but the U.S. not, that the Europeans could lose out on market shares and margins, and therefore they have been considering the postponing the review of the Trading Book for Europe as well. Taking a step back, if we think about capital distributions in Europe, I mean, the yields are already relatively high. So, their dividends yield 3-4%, at buybacks we are above 10%, so they're already screened quite well, but they don't get the credit. And given where the share prices are, above book value, buybacks might not be the most accretive tool to crystallize the value from excess capital. So, we have seen banks working on bolt-on deals, some larger but more selective deals in really rare cases, but there's clearly the spectrum of capital distribution has been investigated with organic growth as relatively limited, but distributions, but also bolt-on deals, mainly in the non-capital-intensive space. Clearly, our capital distribution is a value driver for those share prices and the companies.

Joe Coletti

Loan growth was a key driver for regionals last year, alongside net interest margin expansion. But growth has been selective and private credit continues to compete for share. Where is lending volume actually coming from today, and how durable is it across regions and asset classes?

Gerard Cassidy

Loan growth in the first quarter accelerated for all of the banks, regionals and the money centers. And the growth was driven by a handful of factors, but most importantly, it was commercial loan growth that drove total loan growth in the quarter, and this growth is being supported by the change in some tax laws in the United States, with the Big Beautiful Bill, which allows, now, corporates in America to make capital expenditures and expense 100% of that expenditure in year one. And that's obviously new, and that's part of the reason you're seeing such growth in corporate loans. Also, with the build-out of data centers, the data center build-out in the United States is very robust, and as a result of that, that is also favorably impacting loan growth for the banks. Now the banks are not necessarily making the construction loans to build the data centers, but they are certainly making the loans to the suppliers of the build-out of the data centers, such as the plumbers or the HVAC folks as well as the electricians. We're also seeing growth in the investment banking area of the portfolio, where many of our large banks are supporting their customers with repo financing as well as acquisition financing, and this is also contributing to the growth in the United States. And then lastly, the NDFI growth is still there. So last year, when you look at total loan growth in the United States, it probably averaged around 4-5%. This year, we were expecting it to come in around 6-7%. It probably will come into something higher if we don't run into an economic slowdown because of the conflict in the Middle East. So, loan growth was a highlight of the quarter so far, along with the margin expansion, a steeper yield curve is quite favorable to a lender. And when you have the Fed funds rate around three and a half percent and the long end of the curve at four and a quarter, that provides a steeper curve for the lenders. And it's been 20 years, at least here in the United States, that we've had a short end of the curve. The Fed funds rate above 3% with a positive slope of 75 to 100 basis points. When you have that type of environment, lenders do very well, and that's with the regional banks having a larger percentage of revenue coming from lending, they tend to do better than the money center banks. We also are seeing the so-called back book, meaning the bonds that were purchased five to six years ago during the pandemic. As these bonds come up for repricing, what you're seeing is that the coupons, or the yields of the bonds that are coming up for renewal are much lower than the yields that the money is going into today. So that's also helping with the margins for the banks. So the outlook right now for lending in the U.S. is very good, and should this inflation issue that the U.S. is confronting today and potentially could get worse, if that filing comes in and is pulled down and the Fed in the beginning of next year possibly cut short-term rates, that would be even better for the banks.

Anke Reingen

In Europe, we had really strong loan growth on improving household financials, slow unemployment, declining interest rates, and also house prices moving higher, but obviously with a recent move in long range upwards, that has dampened somewhat the excitement. On the corporate side, there's obviously been lots of excitement, a year ago with respect to different stimulus packages, and they actually saw at end of last year, beginning of this year, some pickup in corporate loan demand, and that's been reflected in the numbers. But recently, there's clearly concerns that declining confidence has dampened the view of the corporates to invest. And we'll need to see how this plays out. Maybe just to close the circle to an earlier topic about stable coin tokenized deposits. We also recently looked at tokenized mortgages in the UK and as a way to increase the efficiency of some of the products that are key to some of the banks in our space.

Joe Coletti

Let's turn to investment banks and Anke, I want to start with you. After a strong 2025 early signs in 2026 are encouraging, but the environment is shifting. How do you see M&A, ECM, and DCM playing out for the remainder of this year?

Anke Reingen

The setup for investment banking seems still quite strong with good pipelines across M&A, ECM, and that's especially in the U.S., given deregulation. Obviously the execution of the pipeline depends on the environment, and there have been some slowdown, especially in the software sector. Trading, on the other hand, has performed really strongly given the volatility. I mean, really, one thing that stood out, for Q1 results from the U.S. investment banks coming from a European lens is the growth in the balance sheet. And be really interesting to see if this is a sign that the U.S. banks investing more capital into their capital markets business because of softer regulation, and what the implications could be for product margins and market shares, especially for the European players.

Gerard Cassidy

The first quarter results for the investment banking businesses or capital markets businesses were very good. As Anke pointed out, the trading activity in particular was quite robust. If the volatility dies down, we could see a reemergence of the equity capital markets business with some very large IPOs that might be coming this year. So, the IPO calendar is probably the only area in capital markets that has not really come back 100%, and the banks are talking about strong pipelines. And so, I think that's the other area that's going to bode well for the investment banks, is that industries know that this administration obviously ends at the end of '28, early '29, so there's a two- to two-and-a-half-year window of real opportunity for consolidation. And the investment banks and their advisory businesses are the likely beneficiaries of that should that take place.

Joe Coletti

So, want to close by having you look ahead a little bit. Sentiment was constructive coming into this year, but rising uncertainty has shifted the tone. How are investors positioned today, and what risks or catalysts over the next 12 months could meaningfully change the narrative and leadership within the banking sector.

Gerard Cassidy

So, the sentiment has shifted to more caution, more concern, in general, as PMs that are not as committed to bank stocks as value investors, we feel have lowered their exposure to the banks. But as we look out into the future, should we start to have more stabilization in the Middle East, I think you'll see that the generalist PMs recognizing that the banks are still very profitable and the outlook for them remains strong, they'll come back into the stocks once again, because on a relative basis, the bank stocks in the United States are still very inexpensive relative to the markets and also from their own individual valuations, they're not as expensive as they were in the beginning of the year, and therefore that could bring more people into the banks.

Anke Reingen

At the end of the day. I mean, we all care about the economic outlook, probably the politics, and maybe this explains as well the volatility in the share prices, because the outlook changes, really on a not daily basis, but the speed is quite fast. We're watching for oil price, inflation, interest rates, confidence level. It's all key drivers of profitability and as well as the ability to generate capital and distribute. So, I think, it's really what the economic outlook and politics, what we've been watching. I think where the valuations are, I think we are a bit more selective on the stocks, as Gerard mentioned before and I made as well the comments, but yeah, overall, the fundamentals are strong, but the outlook will be defined by where the economy is moving towards.

Joe Coletti

Thanks for listening to Strategic Alternatives, the RBC Capital Markets podcast. This episode was recorded on April 20, 2026. Listen and subscribe to Strategic Alternatives on Apple, Spotify, or wherever you get your podcasts. If you'd like to learn more or continue the conversation, please visit rbccm.com/strategicalternatives, or contact your RBC representative. See you all next time.