Big banks had strong earnings but high expectations hence reaction, says KBW's Chris McGratty
Speakers
Chris McGratty
— KBW head of U.S. bank research
Summary
Chris McGratty of KBW joins Closing Bell to discuss big bank earnings and the outlook for bank stocks. He says results were strong but expectations were high and political risk triggered a selloff, while he remains positive on universal banks. He is also more sympathetic to the broadening financials trade, especially regional banks with net interest income growth such as Citizens and KeyCorp, and sees room for broader capital return and M&A across the banking spectrum. He downplays the proposed credit card rate cap as likely political jawboning.
- Big bank earnings were strong but high expectations and political risk led to a selloff.
- McGratty remains positive on universal banks, citing strong fundamentals, high-teens returns on capital, capital returns, and deregulation.
- He is more constructive on the broadening financials trade, including regional banks with net interest income growth.
- Citizens and KeyCorp are named as having baked-in net interest income growth stories.
- He expects broader capital return—dividends, buybacks, and M&A—across the banking spectrum.
- Investment banking pipeline is materially higher year over year, but trading revenue growth is normalizing.
- The proposed 10% credit card rate cap is seen more as jawboning, though it would break credit card lending economics if enacted.
Ideas
Regional banks offer NII growth stories
He expects regional banks to report pretty good loan growth, margin expansion, and top-line growth, with net interest income growth as the big picture. He specifically likes Citizens and KeyCorp because they have really baked in net interest income growth stories.
Sticking with universal banks
He is sticking with universal banks despite this week's headline and political risk. He argues their fundamental backdrop is still quite strong: they are delivering high-teens return on capital, returning significant capital to shareholders, and still benefiting from deregulation. He is confident in the capital markets calendar, with investment banking pipelines materially higher year over year, though trading revenue growth is normalizing.
Financials trade should broaden
He is more sympathetic to the broadening out of the financials trade. He wants to see broader capital return beyond buybacks at the largest banks, including dividend increases, buybacks, and mergers, and expects that to flow through the entire banking spectrum. Deregulation is lowering capital requirements with more room to go, which supports this broadening.
