Investment thesis  

• The financial sector has underperformed the market so far this year, but we believe this performance is temporary and does not reflect a deterioration in its core businesses. The decline is mainly due to geopolitical uncertainty (the conflict with Iran), which has flattened the yield curve somewhat, challenging comparisons in the trading business relative to last year, and isolated disappointments in the earnings of some banks—not due to a deterioration in the credit cycle. This divergence between price and fundamentals is precisely the opportunity.
• The net interest margin is strong, as loan growth has offset the net interest margin in 2025–2026. Looking ahead, net interest income (NII) for the U.S. banking sector is expected to grow between 5% and 9% year-over-year.
• A historic release of capital is on the horizon. The new regulation (Basel III Endgame) reduces minimum reserve requirements, which will allow institutions to support increased lending, expand their activity in capital markets, and ultimately distribute more resources to shareholders via buybacks and dividends.
• The major banks ended the first quarter of 2026 with results that, overall, exceeded expectations by approximately 3% in earnings per share, marking a quarter of operational strength amid a complex macroeconomic environment: war with Iran, high oil prices, and persistent inflation.
• Loan growth was the highlight of the quarter. Loans in Q1 2026 grew by 1.9% compared to the previous quarter and by between 9% and 11% year-over-year on average among the major institutions, with commercial and industrial lending rising 14% year-over-year. In terms of cost discipline, the sector is showing convincing results.
• Meanwhile, projected bank earnings growth continues to rise (currently around 14%), while valuations remain attractive. Following the strong Q1 2026 earnings season, the magnitude of earnings revisions in the financial sector has increased again, representing a further positive development.
• Given the combination of upward revisions to 2026 earnings estimates and the sector’s recent underperformance, multiples have declined by approximately -3x to 14.9x for the financial sector’s forward P/E ratio and by -2x to 11.7x for the forward P/E ratio of banks specifically. These levels are in line with the lows recorded following Liberation Day.
• Absolute valuations are near average levels, with an 8% discount relative to the average valuation of the S&P 500.
• With regard to exposure to the private debt segment, for the first time, all major banks provided details on this segment. On average, approximately 3% of their portfolios consists of loans to private credit counterparties, with average LTVs in the 60%–65% range. Total exposure to non-bank financial institutions is higher (~15% of loans), but the specific portion of private credit is limited.
• One development to watch is the surge in redemption requests for private credit funds, which jumped to 12.4% of NAV in the first quarter of 2026, a sharp increase from 5.1% in the previous quarter, which could put pressure on the quality of the collateral backing bank loans to this sector. Although exposure is low and the risk appears manageable given the structure of the loans, growth in loans to non-bank financial institutions is showing signs of slowing.
• Finally, it is important to make a distinction within the U.S. financial sector, since, when broken down by subsectors, we see that businesses such as credit cards and asset management have accounted for much of the sector’s underperformance this year. This contrast is evident when comparing the year-to-date and 12-month returns of the major banks versus the financial sector as a whole, where even the major banks have outperformed the S&P 500 over the past 12 months.
• This lag has been attributed to regulatory uncertainty and increased competition in digital payment methods and liquidity and credit risks related to exposure to private credit in the asset management business.
• This allows for exposure to the financial sector through two strategies: maintaining exposure to banks, while also positioning for a recovery in the asset management and credit card sectors via the XLF ETF, or maintaining a “purer” exposure to large banks via the KBWB ETF.
• The sector's upside potential is around +15%. 

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Investment, Finance, and Business Team | Stock Brokerage Firm