KBW CEO Tom Michaud on Bank Valuations, Credit Strength, and M&A Outlook

Bank Industry Fundamentals

• 💡 The fundamental story for the banking industry is very good, with expectations for 13% higher earnings per share next year.
• 📈 Estimates are being raised for most banks due to strong revenue, controlled expenses, and a positive pipeline.

Credit Quality and Risk

• ⚠️ Despite initial concerns following bank failures, credit costs have been better than expected, with credit remaining solid.
• 🏦 The industry is currently over-earning on credit, and while provisions will rise, they are expected to be manageable.
• 🔍 Areas of potential risk include private credit, particularly in financial institutions that have experienced rapid growth.

Mergers & Acquisitions (M&A) Outlook

• 🤝 M&A activity is expected to continue into 2026, supported by a strong economy, favorable stock prices, and the success of consolidation.
• ⏱️ Regulatory approval timelines for mergers have significantly shortened, returning to a more traditional, pro-growth approach.
• 🚀 Banks may feel pressure to act now to capitalize on a perceived pro-growth administration before potential policy shifts.

Bank Valuations and Rerating Potential

• 📊 While bank stocks are trading near all-time highs, they are still significantly cheaper than the broader market.
• 💰 Return on tangible common equity (ROTE) is identified as a key driver for valuation relative to book value.
• 📈 Major banks are resetting ROTE targets, signaling confidence in their business models to drive increased profitability and potential rerating.
• 💸 Dividend yields, such as Citizens' 9.5% increase, also present an attractive component for investors.