Strong earnings growth will continue for banks in 2026, says KBW's Christopher McGratty

Core Viewpoint - The financial sector is expected to remain healthy into 2026, driven by strong earnings growth and favorable macroeconomic conditions, including a steep yield curve and benign credit conditions [2][5][6]. Group 1: Earnings Growth and Market Performance - The financial sector is experiencing solid double-digit earnings growth, which is anticipated to continue [3]. - Large banks have seen an average increase of 40% year-to-date, while smaller banks have increased by about 15%, indicating a significant performance gap [3][4]. - The capital markets, M&A, trading, and investment banking have contributed to this strong performance, with volumes up 40% [4]. Group 2: Macro Conditions and Federal Reserve Impact - Healthy capital markets are crucial for the strength of banks, with credit spreads being a key factor to monitor for 2026 [2]. - The Federal Reserve's policies, including potential interest rate cuts, are expected to support net interest income and revenue growth for banks [6][7]. - The end of the longest period of yield curve inversion has allowed for a favorable repricing of bank balance sheets [7]. Group 3: Investment Opportunities - Larger banks are viewed as the best investment opportunities due to their scale and stability, with a recommendation for Keycorp and Citizens Financial, which are expected to improve their return on equity (ROE) significantly [10][11]. - Citigroup is highlighted as a top pick, despite its substantial price increase this year, due to its leverage to capital markets [11]. - There is potential for value across the spectrum of banks, with smaller banks trading at lower earnings multiples but still showing strong ROE [13].