Bank Earnings Roundup: Pockets of Opportunity in a Fairly Valued Sector

US bank shares were weighed down by shifting macro concerns in 2026, first by higher unemployment from AI disruption, then by higher inflation, the Federal Reserve’s rate hikes, rising 10-year Treasury yields, and renewed AI disruption worries after the launch of Meta’s AI agent, Muse.

While pockets of opportunity persist, we view the US banking sector as fairly valued, with regional banks trading at a more attractive valuation than money center banks. US banks trade at an 11.6% average price/tangible book value premium to their trailing 10-year average, with Citigroup C and First Citizens FCNCA posting the largest multiple expansions at 49% and 48%, respectively. This follows a stretch in 2023 and 2024, when deposit outflow concerns, unrealized securities losses eroding capital cushions, and rising credit losses tied to commercial real estate loans pressured sector valuations.

US banks under our coverage now trade at a weighted average price/fair value estimate of 0.96, down from 1.01 at the end of the second quarter. Within a sector that looks fairly valued, Bank of America BAC and Regions Financial RF screen as relatively attractive, trading at discounts of 15% and 18% to our fair value estimates, respectively.

Healthy Economic Backdrop Supports Loan Growth

We have seen loan growth improve from the low- to mid-single-digit range since the second half of 2025. GDP growth remains the primary driver of organic loan growth, and our mid-single-digit economic growth outlook supports robust loan demand over the near-to-medium term. Banks also have excess liquidity and capital to support lending. We expect high-single-digit percentage loan growth for our covered US banks in 2026, with acquisitions boosting regional bank growth.

US banks are well-capitalized. With pending changes to the Fed’s stress-testing methodology, the central bank is keeping the stress-capital buffer requirement unchanged in 2026 for all banks. Along with the positive developments in Basel III bank capital regulations, banks should have excess capital to deploy for balance sheet growth, dividend payouts, and share buybacks.

Net Interest Income: Higher-for-Longer Rates Fuel Deposit Competition

Balance sheet growth and net interest margin are the two main drivers of net interest income. Regional bank acquisitions boosted interest-earning asset growth (loan-driven) in the second quarter. NII growth accelerated, driven by strong balance sheet growth since third-quarter 2025, in spite of rangebound NIMs. Looking ahead, economic strength and capital relief should support growth through year-end 2026, although intense competition for deposits amid higher federal-funds rates will cap NIM upside.

Banks typically borrow short and lend long, funding from depositors at the short end of the yield curve and lending to borrowers at the longer end. An upward-sloping curve therefore benefits net interest margin, all else equal. Inflation puts upward pressure on the short end in 2026, and we now incorporate two rate hikes in 2026 in our base-case forecast. Wells Fargo WFC, Zions ZION, and First Citizens remain the most asset-sensitive names, though higher funding costs will partially offset the benefit of rising interest rates.

Net interest margin depends primarily on interest-earning asset yields, interest-bearing liability costs, and leverage. Asset yields reflect interest rate benchmarks, interest spread, and balance sheet structure. Loan yields typically exceed securities yields because banks take on more credit risk, and loan demand and supply also shape the interest spread (the difference between yields and rate benchmarks). With the Federal Reserve starting rate hikes in September, floating-rate loans like commercial lending will reprice higher.

In the current cycle, banks face more deposit competition than in prior interest rate cycles, with the sector’s cycle-to-date beta (the third quarter of 2024 through the second quarter of 2026) in this rate-cutting cycle at 35%, versus a 47% historical average. This means banks haven’t benefited as much from falling rates as they have in the past. We expect the two federal-funds rate hikes in 2026 to put upward pressure on funding costs, and we have materially raised our 2026 funding costs compared with our forecast at the beginning of 2026.

Fee Income and Non-Interest Expenses: We Expect Strong Growth in Fees and Expenses

We expect market volatility and AI-related fundraising to support trading income and growth in investment banking advisory fees in 2026, though we expect some normalization over the longer term. Asset-based fees, including wealth and asset management and custodian servicing, also performed well in the second quarter, driven largely by positive market movements and flows.

Expense growth picked up in the second quarter of 2026 from the first quarter, driven mainly by stronger capital markets fee growth and regional bank acquisitions. Underwriting and advisory businesses carry higher employee compensation ratios, which add to money center banks’ expense base. Because expense synergies typically take between two and three years to fully materialize, acquisitive regional banks should see elevated expense growth through the rest of 2026.

Delinquency rates are one of the most reliable leading indicators for credit costs. We expect 2026 credit costs to be relatively stable from 2025 levels, with major lending categories seeing stabilization or improving delinquency rates in recent quarters. We’re monitoring an uptick in the other consumer lending (mostly auto lending) delinquency rate (up 5 basis points sequentially in the second quarter). Elsewhere, we are glad to see credit card delinquency improve.

US Bank Stocks: Our Top Picks

Regional banks are trading at a relatively more attractive valuation than money-center banks. Bank of America and Regions Financial are our preferred names.

Bank of America

Bank of America benefits from one of the lowest-cost retail deposit franchises in the United States, and we believe it will retain a material cost advantage amid industrywide funding pressures. As the primary bank for 92% of its retail clients, it forges deep, holistic relationships that drive efficient revenue generation, reflected in a preprovision net revenue per risk-weighted asset ratio among the strongest in the industry.

With roughly half of revenue from diversified noninterest income sources, earnings are more stable than those of peers. Lastly, about 52% of its held-to-maturity portfolio, composed of long-dated Treasuries and MBS yielding 1.4% and 1.9%, respectively, matures over the next five years, supporting continued net interest margin expansion irrespective of short-term interest rate directional movement. We believe this will serve as a catalyst for a valuation rerating.

Regions Financial

Regions is our top pick among US regional banks. We still think the bank’s strong deposit funding advantage should benefit its net interest margin and profitability, even after incorporating higher short-term interest rates in the near-term. Regions Bank is the primary bank for a lot of its customers in its rural Deep South footprint, and this clientele should face significantly lower disruption risks from artificial intelligence personal assistant tools and/or stablecoins compared with the tech-savvy consumer cohort.

The strength of Regions’ deposit franchise is exemplified by its granularity, with the bank boasting an average consumer demand deposit size of $5,000 as of the second quarter of 2026, 43% lower than that of the average US consumer checking account size of $8,800 according to the Federal Reserve’s Survey of Consumer Finances in 2022.