Bank stocks have been unloved for much of this year due to concerns about rising bond yields and moderating capital-markets activity. Reflecting growing investor skepticism, the S&P 500 financial sector posted its worst month in September since the 2023 regional banking crisis.
Yet most of the big U.S. banks just reported strong third-quarter earnings, helped by healthy credit trends among consumers and corporate borrowers. The banks' wealth management units are humming, and traders and investment bankers alike are turning in near-record results.
Erika Najarian, the U.S. large-cap bank research analyst at UBS, has covered the industry for more than 20 years. "Bank stocks can be tough," she says. "The way investors can benefit most, from a stock performance perspective, is in the anticipation of things getting better."
And when that happens, she adds, "everyone is worried about the next shoe to drop."
Still, Najarian is positive on some stocks in the group, including Morgan Stanley and JPMorgan Chase. She explained why, and shared her views on other big lenders, in an Oct. 19 interview with Barron's at UBS' Manhattan offices. An edited version of the conversation follows.
Barron's: The banking industry, as usual, was the first to report quarterly earnings. How would you assess the results?
Erika Najarian: The results were pretty solid if you adjust for the fact that the bond market rout intensified in the last two weeks of the quarter. That led bank clients to say, "I'm not going to sell my company or raise capital" during that period.
The optimism about the pipeline was still intact, and expressed even by Jamie [JPMorgan Chase CEO Jamie Dimon], who tends to take the most conservative tone among the bank CEOs. But the banks can't really get traction with investors for two reasons.
No. 1, the generalist investor might think the bank trade is long in the tooth. The upside for bank stocks hasn't been that long in duration since before the global financial crisis. No. 2, the 10-year [Treasury yield] has settled back a bit, but there is concern about what the Treasury market is telling us.
What is it telling us?
Bond yields strongly influence companies' and governments' ability to raise capital. Investors are worried that higher yields will curb borrowing activity on both Wall Street and Main Street.
There is probably more acute concern over capital markets activity. If some of the big initial public offerings anticipated by investors occur, that could go a long way in improving sentiment toward bank stocks.
Which bank is best positioned over the next year or so, given higher bond yields and possibly higher interest rates?
Morgan Stanley. It might sound counterintuitive, because half its business is investment banking and half is wealth management, so it is exposed to equity markets in both areas. But the company has an enviable TMT [technology, media, and telecommunications] investment-banking franchise, which will benefit if deal activity continues.
Success in investment banking also helps the wealth management business. As of September, Morgan Stanley managed the stock compensation programs for nine of the 10 biggest unicorns [privately held start-ups worth at least $1 billion] globally. The firm takes companies public, then handles their employees' stock plans. Having that lever is critical.
JPMorgan Chase is equally well positioned. It has so much excess capital to use. It cares about sustainable earnings, not really pleasing the Street in any given quarter, so it has kept its balance sheet flexible, given its significant liquidity.
Morgan Stanley also has a lot of excess capital. We view excess capital as future earnings, stored up for a time when the interest-rate environment is less helpful to lenders' profit margins.
Morgan Stanley strengthened its workplace wealth business through its Solium Capital acquisition in 2019. It sounds like that business is central to your thesis.
Yes, although I am referring to more than Solium. Morgan Stanley bought E*Trade Financial in 2020. It didn't regard E*Trade as a threat to its business, but as an opportunity to reach active investors who might become wealthier later in life. The company has demonstrated an ability to say, "In a changing world, how do we introduce ourselves to people who will have wealth later?"
Citigroup reported solid third-quarter earnings, but the stock fell about 4%. Did that response say something broader about investors' sentiment regarding Citi?
Citi continues to build out its institutional investor fan base. The better it executes, the less volatile the stock will be. Jane [Citi CEO Jane Fraser] has done a great job fixing legacy issues at the bank. That said, the bank is still building credibility with investors.
Citi's return on tangible common equity will be more than 11% this year, but Wall Street is worried that the company will have a big expense issue, or a revenue issue, in the fourth quarter. No matter how the math works out, it is still building credibility with investors.
Bank of America may also need to build credibility with shareholders after it was fined by the U.S. Treasury for allegedly violating anti-money-laundering laws. How are investors viewing the stock and CEO Brian Moynihan?
Investor sentiment is colored by the fact that the stock has underperformed so materially. Bank of America is up 7% over the past five years, while other [U.S. systemically important banks] are up 75% to 150%. That's the report card investors care about.
The discussion about Brian [Moynihan's tenure] is evolving naturally. You heard another analyst ask about his succession plans on the latest earnings call. Brian just turned 67. He is only three years younger than Jamie [Dimon]. There have been succession discussions about JPMorgan for a decade. While Brian named his bench last year in theory, investors don't know the Bank of America bench as well as they know JPMorgan's. Analysts want to understand the next steps at Bank of America in terms of succession.
Deregulation has been a tailwind for the banks in President Donald Trump's second term. With the midterms approaching, how would Democratic control of one or both chambers of Congress impact the industry?
I'll address this in terms of regulation, mergers and acquisitions, and "vibes." From a regulatory standpoint, the president assigns all the agency heads. They have jurisdiction over the rules. That won't be slowed down unless there is a change in the law.
Second, would Democratic control of one or both chambers mean that CEOs are pulled into Congress more often to testify? Probably.
As for M&A, the pace of activity might accelerate, whether among banks or other companies, benefiting investment bankers. After the midterms, the shot clock starts before the next presidential election. Many banks think there could be a wave of deal activity ahead of the next presidential election.
The vibes, or sentiment, could be toughest for the card companies. We saw President Trump's early-2026 post calling for a cap on credit card interest rates, and the reintroduction of the bipartisan Credit Card Competition Act in January. To address affordability issues, both parties likely will be talking before and after the election about credit-friendly actions related to consumer products such as credit cards.
So, the midterms might mean more for, say, American Express than a big, diversified bank?
Amex might not be as impacted because the American Express card tends to be seen as the charge card for fancy people. Full-spectrum lenders such as Capital One, Synchrony Financial, and Bread Financial -- which also earn money from late-payment fees, and generally charge higher interest rates on balances -- might be more vulnerable than Amex.
Goldman Sachs is one of the two bank stocks you rate as Neutral, along with Citi. So far this year, Goldman's stock has underperformed the broader market and many peers. Did anything in the company's latest report alter your thesis?
Goldman killed it. For two straight quarters, I nearly fell out of my chair when I saw the beats on revenue. In the second quarter, the company beat earnings expectations largely due to strength in its equities business, and in the latest quarter, the beat was due to strength in investment banking and equities. I missed upgrading the stock at lower levels, as I couldn't have forecast the kind of outperformance it is delivering.
If [CEO] David Solomon is right and Goldman continues to build sustainable revenue, there could be an opportunity for me to get more positive on the company's equity. But the ultimate question investors have regarding Goldman is, how long will this capital-markets cycle last? The way you answer that determines whether you step in and invest in Goldman.
So far, investors have concluded that if they are going to invest in the artificial-intelligence supercycle, they should do so directly, rather than through the facilitators -- including banks. But that can change if these megadeals come through, and if a "blue wave" of Democratic wins in the midterms launches a wave of capital-markets activity ahead of the 2028 Presidential election.
Thank you, Erika.
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