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2026 – The Revenge of the Regionals – Capital Rationalization and Deregulation to Drive Better Returns – Reiterate Sector Outperform on USB and Sector Underperform on WFC

Published on January 8, 2026

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Bill Hebel

Brian Herlihy

After a few fits and starts in 2025, the regionals finished the year strongly aided by an accommodative Fed, a steeper yield curve, some better loan growth, and credit metrics remaining solid. Here at 22V, our strategy team has opined on what we believe is an important nuance regarding Fed posture. With inflation data coming in largely better than investors expected, we believe that the economy can run at a higher speed limit if you will without inviting additional inflation. That higher pace can help arrest some of the labor weakness experienced in the fall and extend the economic cycle. While far from a slam dunk, the recent experience has been encouraging and for the banks in particular, a gradually steeper curve which has been more pronounced from the 5yr part of the curve and out has been helping sentiment. We’ve even been starting to see it in the 2-3 year part of the curve which suggests to us that investors are beginning to feel that the cone of Fed Funds rate cuts has narrowed down to roughly 2 in ’26. With line of sight on the terminal level of Fed Funds this cycle and hopefully a stabilizing labor market, we believe the banks should continue their outperformance.
We’d highlight out recent upgrade of USB Bancorp (link here) as one of our preferred names for ’26 given the self-help nature of the story around improving the payments side of the business along with a positive gearing to the SOFR/5month part of the curve which has been steepening. In addition, unlike many of the banks, USB is just beginning to embark on a more aggressive capital return profile which we think will also improve their returns. We raise our target On USB from $55 to $61. On the flip side, we continue to have trouble seeing upside in Wells Fargo (WFC) from here. Although we raised our target to $95, we have trouble arguing for a higher multiple even when factoring in a 17.5% ROTCE for WFC by ’27. Management also noted at a recent conference that they are “not indifferent to the stock price” which from our perspective likely means that the buyback will be more selective from here as a part of capital management. As such, we reiterate the sector underperform.

“It’s Different This Time”

One of our favorite investing phrases. If only all of us had a dollar for every time this phrase has been uttered over our careers. We use it a little tongue and cheek though to point out a few things that are legitimately different this “cycle.” I even use “cycle” guardedly only because sometimes these cycles have tended to blend into a series of mini-cycles. Other times, what has felt like a true secular shift may have actually been a long cycle that is starting to turn. Let’s put a finer point on it with a few “cycles” the banks are navigating through.

The rate cutting cycle – This time around we’ve had a fairly unique two step down move in rates (4 in late ’24 & 3 in late ’25), both in fairly quick succession. While this rate cycle isn’t over yet, the uniqueness of the pause between the two and the chance for deposit pricing to stabilize due to some increased competition may very well throw off through the cycle deposit betas this time. We’ve heard many management teams talk about the betas being symmetrical on the way down to what they were on the way up. As we model through it, we think that narrative may run into some issues. Our current modeling suggests that we may endure a period of fairly stable deposit betas (albeit still trending gradually higher) through 2026 into 2027. The fact that we came off of ZIRP policy most recently and if the current conventional wisdom is correct, are headed towards a 3% terminal rate, there’s an argument to be made for less than symmetrical betas on the downside at least until the end of the cutting cycle. Coming off of ZIRP does qualify as “different this time.” In addition, we would argue that we also have a bit of “different this time” happening at the top of the bank market cap spectrum. There was a time when the mega cap banks traded at discounts to the regionals. This cycle has turned that a bit on its head with market leader JP Morgan now trading at over 3x TBV. At their presentation at the most recent conference, Marianne Lake laid out and even more aggressive buildout of the community bank. This strategy makes sense to us – better to grow the franchise than endure buy-back math that is uncompelling. The other “it’s different this time” is Wells Fargo coming out of the asset cap. As we know, the asset cap was effectively a cap on deposits for Wells, particularly commercial deposit growth. How aggressive will Wells be on commercial and consumer deposit pricing from here? Are JPMorgan’s moves on the consumer bank designed to solidify their lead and blunt a resurgent Wells? What will that mean for the deposit pricing umbrella under which the rest of the sector operates?
Deregulation – It’s very clear from Vice Chair of Supervision Michelle Bowman that her comprehensive review of banking regulations is hitting it’s stride. In a speech given yesterday, Bowman pointed to streamlining and tailoring of regulations with the desire to enhance risk management through information sharing, updating the fixed asset rules, streamlining regulatory reporting, improving transparency around stress testing, and rationalizing capital thus helping the largest banks to re-intermediate the treasury market.
Capital – With the more transparent stress testing and lighter capital touch (and benign credit trends), the regionals can accelerate capital return and enhance their ROTCE’s. One nuance we’re attentive to as we model out the companies is that as the capital returns kick in to a higher gear, the power of compounding helps accelerate the return profile particularly as we move into ’27. We’ve adapted that concept into our price target methodology as we look out to YE’27 for a more “normalized” return profile against TBV’s per share that have the more robust buybacks fully incorporated.
Reintermediation of the loan market: Part and parcel with lower capital requirements is the chance to re-intermediate the loan market. We mentioned long cycles earlier in the note and it’s been no secret that private capital has taken share from the banks over many years. We believe that with more capital available for lending and with regulatory tailoring around risk, the banks can on the margin be in a better position to defend their franchises. In addition, the banks are also hopeful that the One Big Beautiful Bill can help accelerate loan growth given the ability of owners to accelerate depreciation on PP&E. We believe there is ample capital for both lending and capital return.
End of QT – As you peruse our individual stock commentary below, you’ll notice more than once a reference to the fact that our estimates in a number of cases came down from 3Q to 4Q due to a smaller balance sheet/more runoff in non interest-bearing deposits. With QT now having ended, we believe that the non-IB runoff can begin to flatten out/inflect which we believe will be welcomed by bank investors.
M&A Environment– While investors have struggled with stock price reactions to announced M&A among the large cap names (ex-we’d argue FITB), as those deals close and financial statements become less noisy, the ability to lever the new franchises and improve returns should help bring investors back to those large cap names. We believe the regulatory environment is as conducive as we can remember with most deals taking ~3 months from announcement to close. With politics always a consideration, it’s unlikely that this will have an unlimited timeline. While the “strike while the iron is hot” phenomenon has been weighing on the acquirers/perceived acquirers, we believe that the other side of recent M&A should help improve return profiles for the buyers.

Valuation: We mentioned using ’27 ROTCE’s relative to ’27 year end tangible book values to do a better job capturing the compounding of buybacks. Below, you can see both the large caps alone and the large and mid-cap names together plotted by valuation against their return profile. Again, we’d note USB’s more attractive valuation relative their return profile vs. that of WFC. On the midcap side, WAL continues to be a notable outlier given what we’d argue has been both a function of their PTPP outlook being less than consensus expectations on a go forward basis and a recent bout of credit concerns. We think WAL remains a “show me” story in the interim with the potential to re-rate over time.

Source: 22V Research Estimates

Source: 22V Research Estimates

Estimate & Price Target Revisions – Large Caps

CFG – Estimates move from $1.13 in 4Q’25 & $5.04 in FY’26 to $1.10 and $5.03 respectively due to some push out in capital markets revenue from the government shutdown. We initiate a $6.17 estimate for FY’27. On a PTPP/share basis, we are essentially in line with 4Q consensus and are 0.3% ahead/0.4% below for FY’26 & FY ’27. Given the swap & private bank drag in results in ’25, investors have been looking towards ‘26/’27 for a more normalized earnings run rate and profitability. While CFG management is targeting a 16%-18% ROTCE by ’27. We shake out at ~15% for FY’27. We raise our target from $55 to $65 which is 1.5x our YE’27 TBV/share estimate.
HBAN – GAAP estimates move from $0.42 in 4Q’25 & $1.67 in FY’26 to $0.29 and $1.55 respectively and we initiate a $1.97 estimate for ’27. The source of the revisions is largely the folding in of the Veritex deal in 4Q and Cadence in ’26. On a PTPP/share basis, we are 2.6% below in 4Q’25 but 0.8% and 2.6% ahead for FY’26 and FY’27. Given the 2 transactions, we do believe investors will have some noise to navigate in the immediate future. We do give HBAN credit for an 18% ROTCE in ’27 and as such, we move our target up to $20.50 (from $18.50 prior) or ~1.75x our YE’27 TBV estimate.
KEY – Estimates move from $0.38 in 4Q’25 & $1.79 in FY ’26 to $0.38 and $1.82 respectively. We assume a $1.4bil buyback in ’26 and a like amount in ’27. We initiate a ’27 estimate of $2.22. We now have ~0.4% upside to 4Q’25 PTPP/share, 0.2% upside on FY’26 PTPP and 5.3% upside to ’27 PTPP/share as we continue to assume another $1.4bil in buyback in ’27. While we have yet to hear where management shakes out on their buyback thoughts post interaction with HoldCo, we expect it to be substantial given their solid capital position. Importantly, that does get us to a 15%+ ROTCE in ’27 and an exit NIM of 3.14% which is on their way to “3.25% over time.” We move our target up to $23 from $21 which is 1.55x our YE’27 TBV/share estimate.
MTB – Estimates move from $4.46 in 4Q’25 & $18.86 in FY’26 to $4.38 and $18.80 respectively, largely due to a lower starting point on NIB deposits and a smaller average balance sheet. We initiate a $21.09 estimate for FY’27. On a PTPP/share basis, we’re ~0.3% below for 4Q’25/~0.4% below in FY’26 and ~0.3% below in FY’27. In the best position from a tangible capital standpoint, we have MTB buying back ~$4.4bil of stock over the next 2 years which is almost 14% of the shares outstanding after buying back ~8.6% of their shares outstanding this year. Whether or not they do so remains to be seen, but if nothing compelling arises on the M&A front, they have plenty of capital flexibility. We move our target up to $223 which is ~1.7x our YE’27 TBV/share estimate.
PNC – Estimates move from $4.29 in 4Q’25 & $17.82 in FY’26 to $4.21 and $17.96 respectively and we initiate a $20.96 estimate for ’27. On a PTPP/share basis, we are essentially in-line for 4Q’ 25 and FY’26 and we’re 6.5% ahead for ’27. PNC plans to give ’26 guidance with FirstBank as part of the guide so we’d caution against getting too excited about how far ahead we are for ’27. That said, depending on the cost save cadence for FirstBank as well as the swap balances going out into ’27, the upside to numbers could be there. Our new price target is $235 (up from $205) or 1.9x our YE’27 TBV estimate.
RF – Estimates move from $0.61 in 4Q’25 & $2.65 in FY’26 to $0.61 and $2.61 respectively, largely due to a lower starting point on NIB deposits and a smaller average balance sheet. We initiate a $2.93 estimate for FY’27. On a PTPP/share basis, we’re in line w/consensus for 4Q’25/~0.5% below in FY’26 and 1.8% above in FY’27. The biggest delta in our ’26 estimates is mortgage banking revenue where we only model mortgage production income and not MSR income. Our NII estimates are in line w/consensus for 4Q’25 & FY ’26 and 1.2% ahead for ’27. Our target moves up from $29 to $31 which assumes 2x our YE’27 TBV/share estimate.
TFC – Estimates move from $1.08 in 4Q’25 & $4.51 in FY’26 to $1.06 and $4.44 respectively, due to a smaller balance sheet. We initiate a $5.14 estimate for FY’27. On a PTPP/share basis, we’re ~0.5% below for 4Q’25/~0.2% below in FY’26 and 0.9% above in FY’27. We fall a bit short of the company’s 15% ROTCE guide in ’27 (we’re at 14.25%). Our price target moves to $53 (up from $47.50) which assumes 1.45x our YE’27 TBV/share estimate. We continue to rate TFC sector underperform.
USB – Estimates move from $1.17/$4.94 in 4Q‘25/FY’26 to $1.18/$4.93. We initiate a $5.65 FY’27 estimate. On a PTPP/share basis, we are essentially in line for 4Q’25 & FY’26 and ~2.2% ahead in ’27 with buybacks picking up meaningfully as we move into ‘27. We do have a 2.99% exit NIM in 4Q’27 which does jive with management’s 3%+ guide and we would point out that the SOFR/5yr steepening of the yield curve will only help accelerate that trend given USB’s sensitivity to that part of the curve. We can also get to a ’27 ROTCE of ~17.5% which also foots with USB’s “high-teens” guide in the medium term along with a ~56% efficiency ratio which is also in line with their mid-high 50’s % ER guide over the medium term. We also have total payments revenue improving from +3% this year to +4.2% next year all in, and total fee income +~5% in line w/USB’s mid-single digit guide for fees in the medium term. We move our target up to $61 from $55 which is 1.8x our YE’27 TBV/share estimate.
WFC – Estimates move from $1.53 in 4Q’25 & $7.04 in FY’26 to $1.54 and $7.01 respectively and we initiate an $8.27 estimate for ’27. On a PTPP/share basis, we are in-line for 4Q’ 25 and 1.2%/1.1% ahead for ’26 & ’27. Our ’27 estimated ROTCE is ~17.4%, right in the middle of WFC’s 17-18% ROTCE guide. Our new price target of $95 (up from $84) assumes 1.9x our year end TBV estimate. As such, we see absolute downside from current levels and continue to rate WFC a sector underperform.

Estimate & Price Target Revisions – Mid Caps

EWBC – Estimates move from $2.31 in 4Q’25 & $9.71 in FY’26 to $2.48 and $10.21 respectively. Liability sensitivity early in the rate cut cycle coinciding with their annual 1Q deposit promotion period post rate cuts will help drive down deposit costs in the near term with the expectation that the margin should remain relatively flat going forward. Once again, balance sheet growth will be key in terms of driving PTPP and EWBC has an excellent track record of not only solid loan growth but deposit growth as well. Our estimate for Q4 is essentially in line with consensus while we have ~1% better PTPP/share expectations for FY’26 & FY’27. We initiate a $10.99 estimate for FY’27. We move our target up to $128 from $120 which is 1.7x our YE’27 TBV/share estimate.
FHN – Estimates move from $0.46 in 4Q’25 & $1.92 in FY’26 to $0.48 and $2.05 respectively. FHN is leaning into the buyback much more aggressively citing at a recent conference that they had already purchased $300mm in stock through early December and were still buying. We have avg. diluted shares outstanding down ~6% this year and we project 6.7% and 6.8% reductions in ’26 & ’27. This helps drive our PTPP/share estimates to be 2.9%, 2.3% and 2.6% ahead for 4Q’25/FY’26/FY’27. We are initiating a $2.30 estimate for FY ’27. We move our target up to $25 from $24 which is 1.5x our YE’27 TBV/share estimate.
WAL – Estimates move from $2.39 in 4Q’25 & $10.64 in FY’26 to $2.43 and $10.47 respectively. With the sub debt offering WAL completed in mid-November and the $25mm of repurchases through 10/17 (10Q), we’ve budgeted in $50mm of buyback over the course of the Q which may very well be conservative. We are initiating a ’27 estimate of $12.04. On a PTPP/share basis, we are 2.5% ahead for 4Q largely on better ECR expenses ($141mm vs. the $140-$150mm 4Q guide) and a bit lower share count than consensus. For FY’26 & FY’27, we continue to be 1.4% and 0.5% below consensus. We move our target up to $103 from $98 which is 1.3x our YE’27 TBV/share estimate. While our framework would suggest further room to rerate relative to profitability metrics, the variability in the model suggests a discount is still warranted until forward PTPP assumptions stop resetting downward.
WBS – Estimates move from $1.56 in 4Q’25 & $6.40 in FY ’26 to $1.53 and $6.64 respectively. WBS disclosed in their 10Q that they had already repurchased $200mm worth of stock through November (consensus at ~$144mm for the full Q). We moved our repurchase estimate up to $225mm in 4Q and moved up ’26 from $320mm prior to $600mm relative to consensus at ~$425mm. Even at $600mm, it would imply ~83% payout ratio which may still end up being conservative. We are initiating a ’27 estimate of $7.32. While our pre-tax, pre-provision earnings are largely similar/slightly ahead of consensus, our PTPP/share estimates are 1.2%/1.7%/5% ahead for 4Q/’26/’27 due to a lower share count (1.7% lower than consensus in ‘26/4.2% lower than consensus in ’27). We move our target up to $71 from $68 which is 1.6x our YE’27 TBV/share estimate.
WTFC – Estimates move from $2.96 in 4Q’25 & $11.97 in ’26 to $2.97 and $12.11 respectively. Premium finance loan growth continues to drive the upside at WTFC. We continue to have solid growth in premium finance into ’26 but stepping down from the ~13% EOP growth in ’25 to ~8%. As we noted in our initiation, balance sheet growth will be key for the mid-caps and WTFC’s premium finance loan growth helped drive ~17% growth in PTPP in ’25 vs. ’24. We have PTPP up another ~9% in ’26 which in total helps drive our 4Q PTPP/share estimate 1.4% above consensus and our ’26 PTPP/share estimate 2.2% above. We initiate a $12.70 estimate for FY’27. FY’27 is more of a wild card at this point and we are slightly below consensus PTPP (-0.4%) as we have premium finance slowing further and capital building. We’re not too concerned about ’27 at this point especially as WTFC has been a small acquirer over time. In addition, our mortgage banking estimates leave room for upside as well. We move our target up to $158 from $148 which is 1.45x our YE’27 TBV/share estimate.

Current Rating Distribution

Coverage Universe	Percent
Sector Perform	62.5
Sector Underperform	12.5
Sector Outperform	25

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Current Ratings Definition.

SECTOR OUTPERFORM: An “outperform” rating anticipates the company will outperform the S&P Regional Banking Index (peer group).

SECTOR PERFORM: A “market perform” rating anticipates the company will perform in line with the S&P Regional Banking Index (peer group).

SECTOR UNDERPERFORM: An “underperform” rating anticipates the company will underperform the S&P Regional Banking Index (peer group).

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