MW These stocks may offer a haven for investors amid private-credit troubles
By Philip van Doorn
There is a sweet spot for regional banks that are becoming more efficient as they steer clear of loans tripping up private credit fund managers
Most regional banks with total assets ranging from $50 billion to $692 billion showed significant improvement in efficiency ratios during 2025. The deployment of new technology promises several more years of improvement, according to analysts at Jefferies.
Amid all the turmoil, there are still some areas of the market that can provide some comfort for investors, even those that in recent years were the source of Wall Street's angst.
There are always disruptions in the stock market. Investors and traders have had a full plate so far in 2026, with the rapid rise in oil prices stemming from the conflict between the U.S., Israel and Iran. Additionally, there are increasing concerns over credit quality for business-development companies and other private lenders.
But for longer-term investors, a combination of attractive valuations, efficiency improvements and increasing profitability may be why it's an ideal time to commit to regional-bank stocks.
Read: The chorus of disapproval for private credit gets louder as Morgan Stanley fund is the latest to cap withdrawals
Much of the reported credit write-downs and increasing redemption requests by investors in private-equity funds or nonpublicly traded business-development companies (BDCs) has centered on the software industry. Middle-market borrowers in the software industry are perceived to be especially vulnerable if customer demand is reduced as artificial intelligence is deployed.
Meanwhile, the same AI roll out can be a boon for banks that have already been improving their efficiency. Banks have less credit risk from software companies affected by AI because they have tighter underwriting standards than those of private lenders. Additionally, the banks' loan portfolios tend to be less concentrated. The banks also have stringent capital requirements that keep them away from large exposures to the type of higher-rate middle-market loans the BDCs focus on.
For investors in bank stocks, AI is all about efficiency.
"Regional and midcap banks have avoided guiding to explicit AI-driven cost savings, but we expect operational productivity to structurally improve efficiency ratios in coming years," Jefferies analyst David Chiaverini wrote in a report on March 5.
He said efficiency ratios could improve by 100 basis points annually - 1 percentage point - over the next several years, from the current midcap median of 55% and regional bank median of 60%.
A bank's efficiency ratio is its noninterest expense divided by its revenue. Lower is better, and steady 100-basis-point improvements in annual efficiency ratios would be nothing short of radical.
Regional banks have been holding up well as the broad financial sector has been sinking
Before digging into the regional banks, let's look at how the 11 sectors of the S&P 500 SPX have performed this year through Wednesday. All performance figures in this article exclude dividends.
The financial sector has been the worst performer so far in 2026 among the 11 sectors of the S&P 500. The full index has declined 1%.
The financial-services sector has been the worst performer, with a 9.7% decline through Wednesday. This broad sector includes banks, insurers, payment processors and asset managers, and is tracked by the State Street Financial Select Sector SPDR ETF XLF, which is weighted by market capitalization.
That means Berkshire Hathaway $(BRK.B)$ alone makes up 12.7% of the fund. The top five holdings also include JPMorgan Chase $(JPM)$, Visa (V), Mastercard $(MA)$ and Bank of America (BAC) - having a combined 37% weighting in the financials ETF.
But the State Street SPDR S&P Regional Banking ETF KRE, which holds 144 stocks of U.S. banks while steering clear of the largest industry players, was down only 1.3% for 2026 through Tuesday.
On Thursday, XLF's underperformance widened, falling 1% in midday trading, while the regional-banking ETF $(KRE)$ slipped 0.2%.
That might feel like vindication for regional banks. In 2023, the subsector was a source of investor anxiety following the failure of several regional banks. That had led some on Wall Street to say the regional-bank model was broken.
Improving efficiency as regional banks deploy AI
On Sunday, Keefe, Bruyette & Woods analysts Christopher McGratty and David Konrad published their weekly industry summary, reiterating their position that universal banks (JPMorgan Chase, Bank of America and Citigroup (C)) were best-positioned to benefit from the "Triple Crown" of scale, consistency and deregulation, with large regional banks included as deregulation "winners."
We covered attractive pricing and improving returns on equity for the largest U.S. banks in late January.
When discussing efficiency ratios, the KBW analysts wrote that, for banks in the KBW Nasdaq Bank Index BKX, the combined efficiency ratio had improved to 58.7% in 2025 from 61.2% in 2024. They estimate the group's efficiency ratio will improve further to 56.6% in 2026 and 55.7% in 2027.
But when they broke banks down into five asset-size segments, the KBW analysts highlighted what may be an advantage for investors focusing on regional banks.
The KBW team estimated that for the "full cycle" of five years through 2026, universal banks as a group would achieve an annualized return on tangible common equity (ROTCE) of 14.6%. Their strongest ROTCE estimate of 16.4% was for banks with total assets between $50 billion and $100 billion. And for larger "super regionals," the estimated ROTCE was 15.6%.
For those two groups, the KBW team highlighted better financial performance than that of the largest banks.
A bank's ROTCE is its return on equity, excluding preferred stock and intangibles such as goodwill, loan-servicing rights and deferred tax assets.
Chiaverini at Jefferies wrote that he expected regional and midcap banks to be "AI winners," as the group's efficiency ratios were "ripe for gains."
Screening the regional banks
Investors might want to see which regional banks already showed the highest ROTCE in 2025, and how much their efficiency ratios have improved.
If we start with the 23 stocks in the KBW Nasdaq Bank Index and add the 144 stocks in KRE, we have, with some overlap, a group of 158 banks.
Then we can remove the "big six" banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo $(WFC)$, Goldman Sachs $(GS)$ and Morgan Stanley (MS)), then the three large trust banks (Bank of New York Mellon $(BK)$, State Street $(STT)$ and Northern Trust (NTRS)), and then exclude all others with total assets below $50 billion, giving us a list of 27 regional and superregional U.S. banks.
Among the 27 regionals, these 15 had the highest ROTCE in 2025, according to FactSet, with efficiency ratios improving for all but two:
Bank City 2025 ROTCE 2025 efficiency ratio 2024 efficiency ratio Forward P/E Regions Financial Birmingham, Ala. 18.7% 56.9% 59.5% 9.9 U.S. Bancorp Minneapolis 17.7% 58.6% 62.3% 10.1 Fifth Third Bancorp Cincinnati 17.3% 56.9% 59.2% 12.1 East West Bancorp Pasadena, Calif. 16.9% 35.7% 36.7% 10.2 SouthState Bank Winter Haven, Fla. 16.9% 53.1% 56.9% 9.5 Popular Inc. San Juan, Puerto Rico 16.8% 61.1% 65.2% 8.8 Webster Financial Stamford, Conn. 16.7% 46.0% 45.4% 10.1 UMB Financial Kansas City, Mo. 16.6% 57.7% 62.6% 9.2 PNC Financial Services Group Pittsburgh 16.1% 60.0% 63.0% 11.0 Zions Bancorporation Salt Lake City 16.0% 62.6% 64.2% 8.7 Cullen/Frost Bankers San Antonio 15.5% 63.6% 63.1% 12.9 Western Alliance Bancorp. Phoenix 15.3% 58.9% 63.2% 6.6 Huntington Bancshares Columbus, Ohio 15.1% 59.9% 60.5% 10.0 M&T Bank Buffalo, N.Y. 15.0% 56.0% 56.9% 10.6 Old National Bancorp Evansville, Ind. 14.2% 55.1% 55.9% 8.2 Source: FactSet
The right-most column includes forward price/earnings ratios, which are Wednesday's closing prices divided by consensus earnings-per-share estimates among analysts polled by FactSet. Most of these are low when compared with a weighted forward P/E of 14.3 for the S&P 500 financial sector
"Forward-thinking institutions should position themselves as infrastructure providers to the digital economy rather than traditional financial intermediaries," as they deploy new technology, Chiaverini wrote.
He said that Fifth Third $(FITB)$ of Cincinnati "exemplifies this evolution," through Newline, its payment-processing platform, "which enables enterprise clients and fintechs to launch payment, card, and deposit products directly on the bank's architecture."
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March 12, 2026 13:43 ET (17:43 GMT)
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