Could see bigger bank mergers in first half of 2026, says UBS' Erika Najarian

Key Concepts

• Deregulation: Reduced regulatory burdens on banks, leading to increased profitability.
• Yield Curve: The difference in interest rates between long-term and short-term bonds; a steeper curve benefits bank profitability.
• Return on Equity (ROE): A measure of a bank’s profitability relative to shareholder equity.
• Money Center Banks: Large, nationally and internationally focused banks (e.g., JPMorgan, Bank of America).
• Regional Banks: Banks with a more localized geographic focus (e.g., Huntington).
• Basis Points: A unit of measurement used in finance to describe the percentage change in an interest rate or yield (100 basis points = 1%).
• Commoditized Business: A market where products or services are largely interchangeable, leading to price competition.

Bank Stock Momentum & Outlook: A UBS Analyst’s Perspective

Introduction

The interview with Erika Najarian, Senior Large Cap Bank and Consumer Finance Analyst at UBS, centers on the recent surge in large-cap bank stock performance – with Citi, Wells Fargo, JPMorgan, and Bank of America all reaching 52-week highs – and whether this momentum can be sustained into 2026. Najarian attributes this performance to deregulation, increased activity levels, and the anticipation of a steeper yield curve.

Drivers of Recent Bank Stock Performance

Najarian identifies three primary drivers behind the recent positive performance of bank stocks:

1. Deregulation: Reduced regulatory burdens are contributing to improved returns. She estimates this impact to be approximately 150 basis points in near-term returns.
2. Accelerated Activity Levels: Increased activity in both capital markets (benefiting Goldman Sachs) and lending, particularly to middle-market companies, is driving revenue growth.
3. Steeper Yield Curve: The expectation of a widening gap between long-term and short-term interest rates is seen as a positive catalyst for bank profitability. A steeper yield curve allows banks to earn more on lending.

Najarian cautions that sustained outperformance for two consecutive years is “rare,” typically occurring only after recessionary periods when valuations are significantly lower. She notes the exception of 1994-1995, suggesting the current situation is somewhat unique.

Bank Picks for 2026 & Rationale

Najarian highlights three specific bank stocks as favorable picks for 2026:

• Bank of America: She believes Bank of America is currently undervalued despite benefiting from the same positive drivers as its peers. Its valuation is more reasonable compared to JPMorgan, Morgan Stanley, and Goldman Sachs, without sacrificing quality.
• Capital One: Najarian views Capital One as a “multi-year story,” emphasizing its unique competitive advantage as the only U.S. debit issuer and network, and one of four global credit card networks.
• Huntington: She anticipates regional banks will begin to participate in the rally, and Huntington is well-positioned to benefit. The bank has completed two deals in Texas, exhibits outsized growth compared to its peers, and possesses a strong management team.

Impact of Deregulation: Money Centers vs. Regional Banks

Najarian clarifies that the current deregulation efforts are disproportionately benefiting money center banks. Under the Trump administration, regulatory drag has focused more on larger institutions, unlike the previous administration which targeted regional banks. This difference explains the wider gap between book valuation and anticipated ROE for money center banks, as they anticipate a more substantial improvement in returns on equity. Jamie Dimon’s perspective, paraphrasing Jeff Bezos (“Your margin is my opportunity”), highlights the competitive nature of the banking industry.

Bank Mergers & Regulatory Constraints

The discussion addresses the historical reluctance of banks to merge due to concerns about triggering stricter regulations based on asset size. Najarian suggests that this constraint may be diminishing. She posits that banks often prefer to remain smaller to avoid increased scrutiny. However, she anticipates a potential wave of mergers in the first and second quarters of the next year, driven by the current administration’s permissive stance on large deals, though tempered by potential congressional oversight. She notes that the regulatory limits on growth are part of the broader deregulatory effort.

Najarian humorously suggests banks are “sold and not bought,” implying they prioritize maintaining independence and profitability over aggressive expansion.

Data & Statistics

• Deregulation Impact: Estimated to be worth approximately 150 basis points in near-term returns.
• Historical Outperformance: Bank stocks rarely outperform the S&P 500 for two consecutive years, typically only after recessions.
• Capital One’s Market Position: The only U.S. debit issuer and network, and one of four global credit card networks.
• Huntington’s Growth: Exhibits “outsized growth relative to peers.”

Logical Connections

The interview progresses logically from identifying the drivers of recent bank stock performance to specific stock recommendations. The discussion then delves into the nuances of deregulation and its impact on different bank sizes, ultimately leading to a prediction of increased merger activity. The conversation consistently links macroeconomic factors (yield curve, deregulation) to bank-specific performance and strategic considerations.

Notable Quotes

• “Jamie Dimon loves, to paraphrase Jeff Bezos, your margin is my opportunity.” – Erika Najarian, illustrating the competitive dynamics of the banking industry.
• “Banks are sold and not bought.” – Erika Najarian, offering a cynical but insightful perspective on bank merger motivations.
• “You have to be a little bit selective in how you ride the momentum into 2026, because it is rare.” – Erika Najarian, cautioning against indiscriminate investment in bank stocks.

Conclusion

Erika Najarian presents a cautiously optimistic outlook for bank stocks, emphasizing the importance of selective investment based on individual bank characteristics and valuations. The key drivers of performance – deregulation, activity levels, and the yield curve – are expected to continue influencing the sector, but sustained outperformance is not guaranteed. The potential for increased merger activity in the near future adds another layer of complexity to the landscape. The interview highlights the need for investors to understand the specific dynamics affecting both money center and regional banks to capitalize on emerging opportunities.