The second quarter financial reporting season is about to begin! UBS's heavyweight projection on US bank stocks: Behind the full bloom of business, these five main themes will determine investment winners and losers.

As Bank of America Corp is about to kick off the second quarter earnings season, UBS Group AG recently released a research report providing a forward-looking outlook and layout recommendations for investors in the atmosphere of "peak banking industry prosperity." UBS Group AG first pointed out that banking operations are almost in full bloom. Direct lending growth is accelerating. The capital markets are experiencing a recovery. Regarding the deposit environment, according to the latest statements from various banks, competition still exists, but it is not intense enough to drag down market expectations. Regulatory relaxations continue to progress. The US economy still shows resilience. The market has not felt the atmosphere of "peak banking industry prosperity" for a long time, but investors in bank stocks naturally remain skeptical. Currently, the global systemically important banks (GSIBs) are expected to have a price-to-earnings ratio of about 13 times in 2027, while regional banks are expected to have a price-to-earnings ratio of about 11 times in 2027, so the threshold for new funds to enter has become higher. The KBW Bank Index (BKX) outperformed the market in the second quarter, with GSIBs, regional banks, and consumer finance sectors all averaging better performance than the S&P 500 Index since the start of the first quarter earnings season. UBS Group AG expects that the main source of above-expectation earnings for bank stocks in the second quarter will still be capital markets and trading businesses, while the below-expectation risks will mainly come from unexpected increases in deposit costs and increased costs due to the strong performance of the stock market (especially Asian stock markets) driving up trading-related expenses. Five major themes worth watching UBS Group AG pointed out that the key themes to focus on in the second quarter include: 1) Capital Markets - whether actual performance and future prospects can meet market's high expectations? The momentum in the capital markets is hard to stop, although it may not be as optimistic as shown in Dealogic's data. According to Dealogic's data, among the top five banks - Bank of America Corp, Citigroup, Goldman Sachs Group, Inc., JPMorgan Chase, and Morgan Stanley - median merger advisory revenue increased by 16%, median bond underwriting revenue by 17%, median stock underwriting revenue by 88%, and median investment banking revenue by 43%. However, UBS Group AG stated that they will not fully extrapolate based on Dealogic's data because there has always been a difference between Dealogic's fee model and the final disclosed income of the banks. In combination with management comments, the bank expects GSIB investment banking revenue to grow significantly year-on-year, but closer to the guidance given by company management. Overall, UBS Group AG remains optimistic about capital markets businesses but maintains some discipline. The bank expects overall investment banking revenue for GSIBs to grow by about 23% year-on-year; merger advisory business will continue to grow steadily; equity underwriting business will be the highlight, benefiting from the reopening of the IPO market, the restarting of the asset monetization window, and SPCX-related expenses; bond underwriting business will benefit from lower base figures and still healthy debt issuance demand. At the same time, market businesses also have constructive prospects, as market volatility, trading volumes, and customer trading activities continue to provide support. Goldman Sachs Group, Inc.'s outlook for trading business is closer to Bank of America Corp's, rather than Citigroup's. Morgan Stanley said that a growth range of 9%-18% for the industry is reasonable. Wells Fargo & Company's market business revenue is more dependent on net interest income, with transaction fees expected to remain flat quarter-on-quarter. Overall, the second quarter of 2026 is expected to be another strong quarter for capital markets businesses, especially for banks with a higher proportion of equity underwriting and equity trading businesses. The bank expects GSIB market business revenue to grow by about 16% year-on-year in the second quarter. 2) Direct Lending Growth - Can loan growth momentum continue throughout the year? UBS Group AG pointed out that commercial borrowers remain strong and resilient, even in the face of macroeconomic uncertainties. By the end of the second quarter, commercial and industrial (C&I) loan balances increased by about 2.5% quarter-on-quarter, while non-deposit financial institution (NDFI) loans increased by about 3%. This strong performance is not surprising - not only has there been continuous guidance before, the bank also believes that in an environment where prospects for investment banking businesses are improving, overall corporate operations should remain active. The bank believes that the resilience of commercial borrowers should at least be short-term, as companies have shown their ability to cope with a complex operating environment. Consumer loan growth is also steady. As of the end of the second quarter, consumer loan balances increased by about 2% quarter-on-quarter, with credit card loan balances showing the most prominent growth - an increase of about 3% quarter-on-quarter. UBS Group AG believes that attributing this trend entirely to price increases is a mistake. The management of consumer finance companies has continuously emphasized that discretionary consumption remains healthy, especially in travel consumption; the increase in oil prices has not squeezed other consumption categories. Therefore, UBS Group AG believes that the growth in credit card loans reflects more genuine consumption growth rather than inflation-driven. The quality of the credit resulting from this loan growth is also expected to remain healthy. 3) Challenges in Deposit Growth - With loan growth rates currently about double that of deposit growth, how should we assume deposit beta rates in the context of a potential 25 basis point rate hike? Considering the positive outlook for loan growth, UBS Group AG expects deposit competition to heat up again, and deposit pricing will reflect this change. UBS Group AG has revised their previous interest rate cut forecasts and factored in a 25 basis point rate hike by the Federal Reserve in December of this year. The bank believes the period from the second quarter of 1997 to the third quarter of 1998 is somewhat relevant - at that time, after the Federal Reserve paused rate cuts, they also implemented a 25 basis point rate hike during the pause. During that rate hike period, the industry's deposit cost beta was around 50%, which then stabilized; eventually, the deposit cost-to-federal funds rate ratio stabilized at around 81% of the average value of that cycle. Based on the updated interest rate forecasts, UBS Group AG assumes that from the quarter before the rate hike (forecast for the third quarter of 2026) until the end of 2027, the average deposit beta for banks will be around 50%, which corresponds to an average increase of around 12 basis points in the overall sector's average deposit costs. 4) Consumer Resilience - Will continued strong consumer spending and credit trends drive a reassessment of valuations in the credit card sector? Despite the noise-filled macroeconomic environment, the fact that consumer spending remains strong may seem somewhat surprising. As we enter the second quarter earnings season, consumer fundamentals still show resilience, and more importantly, this strong performance is reflected not only in macro consumption data but also in the statements of company management. For example, according to Bank of America Corp's monthly "Consumer Checkpoint" database, per household credit card and debit card spending increased by 4.8% year-on-year in April, and by 5.1% year-on-year in May, significantly higher than the trends in the first quarter and the second quarter of 2025. Consumer spending remains steady, credit performance is stable, and the higher oil prices have not yet had a significant impact. In addition, First Capital, Inc. describes consumers as the "strong shoulder" of the US economy. The company states that employment remains healthy; there is no evidence to suggest that gasoline spending is squeezing other consumption categories; consumers are simply reallocating some of their budgets to gasoline consumption; travel spending remains robust; and there is no widespread weakness in other consumption areas. American Express Company also expressed a more optimistic view. In mid-June, the company stated that card spending was slightly higher than the levels in the first quarter, and air travel spending increased by 9% year-on-year in April. Synchrony Financial's attitude was slightly more cautious. The company's management believes that unless there is a significant and prolonged increase in oil prices, there will be no direct impact on delinquency rates; so far, this situation has not occurred. 5) Regulatory Relaxations - Recently, PNC Financial Group stated that under the Basel III framework, the eRBA method is more advantageous than the RSA method (is it applicable to other banks?), and liquidity regulatory reform proposals are also forthcoming. UBS Group AG points out that the overall impact of this year's stress capital buffer (SCB) testing results is limited, as the Federal Reserve has decided to maintain the SCB mechanism unchanged until 2027. However, the bank believes that the significant differences in the test results further strengthen the reasons for continued reforms in the future, especially as the stress tests in 2027 will adopt new models incorporating public feedback. On the other hand, if the final version of Basel III Endgame is further clarified, it may bring more favorable outcomes. As previously pointed out by the bank after visiting the management of PNC Financial Group, under the eRBA method, some investment-grade (IG) assets can enjoy a 65% risk weight advantage, which may be beneficial for calculating the final risk-weighted assets (RWAs). PNC had previously stated that early analysis showed limited differences between RSA and eRBA. The bank believes that for regional banks with a higher proportion of investment-grade loans, this means that there is still room for an upward trajectory in the final RWA calculations. The bank expects bank management to face more questions regarding the risk weights of investment-grade loans in conference calls. In addition, UBS Group AG believes that the potential benefits from liquidity reforms are greater than market expectations. PNC Financial Group recently informed the bank that the Federal Reserve currently seems to be more focused on shortening the duration of the balance sheet rather than simply reducing the size of the balance sheet (i.e., quantitative tightening, QT). If regulators in the future allow banks to include some pre-arranged discount window financing capacity in the liquidity coverage ratio (LCR), banks can reduce the amount of cash and securities assets that are tied up, while maintaining systemic liquidity. If this liquidity can be reallocated towards loans or securities investments in the future, it will create a significant tailwind for net interest income (NII). If the policy is eventually implemented, this mechanism is expected to release a significant amount of tied-up liquidity in the entire banking sector and provide momentum for NII growth for the entire industry. Overall, UBS Group AG believes that the regulatory and capital return environment remains constructive, and expects repurchase volumes to remain strong until 2027, especially if JPMorgan Chase's recently announced $50 billion stock buyback plan can be seen as a benchmark for the entire industry. The bank estimates that the average stock repurchase volume for the banks they cover in 2027 will be equivalent to around 5% of the market capitalization. How to Layout GSIBs? Stock selection this quarter is quite challenging. UBS Group AG believes that JPMorgan Chase seems poised to exceed market expectations - the bank has already released the "bad news" on the cost side ahead of time, but has not yet fully disclosed the "good news" on the revenue side. However, discussions during the earnings conference calls are likely to be dominated by succession issues for management. UBS Group AG's earnings forecast for Bank of America Corp is 2 cents higher than the market consensus, but the stock is currently considered to be overcrowded. For Goldman Sachs Group, Inc. and Morgan Stanley, the bank expects the market to be prepared for higher compensation and non-compensation costs, while also accepting that Morgan Stanley's pre-tax profit margin for wealth management business may drop below 30% seasonally. UBS Group AG believes that the targets that have cleaner and more promising performance are Citigroup and Wells Fargo & Company. Citigroup will benefit from net interest income (NII) tailwinds beyond market businesses and improvements in capital markets business. Wells Fargo & Company will benefit from lower buyer expectations and relatively light market positions. UBS Group AG's ratings and target prices for GSIBs are as follows: Maintain a "buy" rating for JPMorgan Chase, with a target price raised from $375 to $384; Maintain a "buy" rating for Wells Fargo & Company, with a target price lowered from $105 to $104; Raise the target price for Citigroup from $134 to $150; Maintain a "buy" rating for Bank of America Corp, with a target price raised from $63 to $68; Maintain a "neutral" rating for Goldman Sachs Group, Inc., with a target price raised from $940 to $1120; Maintain a "buy" rating for Morgan Stanley, with a target price raised from $214 to $255. Can Regional Banks continue to see valuation upside? Compared to GSIBs, regional banks still have some attractiveness in their valuations, but their stock prices have been performing quite well recently. UBS Group AG emphasizes that they are optimistic about the performance of PNC Financial Services Group, Inc. in the second quarter earnings season and believes that there is a possibility of an upward revision to their full-year guidance, especially considering that Wall Street's current profit forecasts have not yet fully reflected the impact of the sale of Visa shares on the company's asset restructuring. The bank reiterates a "buy" rating for PNC Financial Services Group, Inc. with a target price raised to $288. At the same time, UBS Group AG still believes that Huntington Banks current valuation is too cheap, but also points out that the market's forecasts for the bank's second quarter net interest margin (NIM) are too high, while cost forecasts are too low. The bank reaffirms a "buy" rating for Huntington Bank, with a target price raised from $21 to $22. How about the Consumer Finance sector? As gasoline prices at the pump decline, the market sentiment and valuations for consumer finance companies are expected to continue to improve overall. First Capital, Inc. Credit has once again become a popular target among market participants, UBS Group AG believes that the market's expectations for costs are adjusting to higher levels. The bank raises the target price for First Capital, Inc. Credit from $270 to $275. However, the bank is not certain if the second quarter will be the point at which pre-provision net revenue (PPNR) is completely "let go". While second quarter costs will be influenced by higher marketing expenses, as well as investments related to Brex (First Capital, Inc. Credit announced in January to acquire the entire equity of the financial technology company Brex for $5.15 billion, with $125 million included in each quarterly budget) and Hopper (about $57 million), the bank expects excess liquidity to remain at high levels (thus suppressing net interest margins), and reserves related to macroeconomic conditions will remain elevated.