Banks were the sector be in last year - and may be in 2026, too, says JPMorgan

By Jules Rimmer

A return of steeper yield curves has afforded banks an opportunity to earn better returns on their loan books. That trend should continue in 2026.

Banks delivered powerful returns in 2025 and look set to build on those in the year to come, posit JPMorgan.

The rise in global interest rates that began in 2022 has been a game changer for the banking sector. However, it was only really in 2025 that the return of steeper yield curves was wedded to the deregulatory agenda of President Donald Trump and a rerating and repricing of banks began in earnest. From JPMorgan's perspective, this trend is likely to continue in 2026.

In fact, banks actually outperformed tech in 2025, and this proved especially true for European banks, as illustrated by the largest European financial exchange-traded fund, the New York-listed iShares MSCI Europe Financials ETF EUFN.

JPMorgan's global strategy team, led by Nikolaos Painigirtzoglou, also points to the increased market capitalization of banks when measured against global GDP. The Painigirtzoglou team finds this has risen to the highest level since 2007, before the global financial crisis, and is a clear indication of confidence in the industry.

Banks' market cap - gauges by the banking universe within the MSCI World index - as compared with global GDP.

This JPMorgan Flows and Liquidity note, published Thursday, also highlights that price-to-book value, a preferred valuation metric for financials, is also at the highest level since 2007.

The most popular benchmark for American banks is the KBW Nasdaq bank index BKX, which rose by roughly a fifth in 2025, after a strong showing in the fourth quarter, in particular. This meant that as the sector kicked off its reporting season with JPMorgan results on Tuesday, banks had set themselves a high bar for success.

When assessing whether the sector is now overextended or if banks are too expensive, JPMorgan's bank analysts, Kian Abouhossein and team, fall on the side of thinking the rerating is warranted and the return of a precrisis interest-rate regime probably justifies a return to the pre-2008 valuation basis. Further deregulation in the U.S., combined with a relatively benign macro and credit environment, means valuations may richen further in 2026.

The biggest driver of improved profitability for the sector seems to be the end of the policies of most central banks that drove interest rates toward zero - and in some cases beyond. This caused a misallocation of capital among commercial banks, as they were forced to extend duration to make a return, and reduced their profitability because many banks were unwilling or unable to pass negative deposit costs on to customers.

The higher-rate environment, JPMorgan concludes, has reversed many of the headwinds previously impacting the banking sector, and this augurs well for 2026 performance.

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

01-15-26 0845ET