John Guarnera, BlueBay Senior Corporate Analyst, discusses how fourth-quarter earnings from major U.S. banks indicate a healthy short-to-medium-term economic outlook.
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Hello and welcome to the latest edition of The Weekly Fix. My name is John Guarnera, and I am a Senior Corporate Analyst on both the Investment Grade and High Yield desks here on RBC’s BlueBay Fixed Income team.
Over the past week we have seen fourth quarter earnings results from the largest US banks and a handful of their regional peers. As always, banks’ quarterly earnings provide a barometer into the health of the economy and enables us to fine tune our sector specific fundamental outlook and related portfolio positioning. Thus far, banks’ fourth quarter results have affirmed our positive view on sector fundamentals with strong results that point toward a benign economic outlook for the short- to medium-term.
In our review of the banks’ earnings, a few key themes have emerged which we believe are worth noting.
First, capital markets activity remains robust, producing strong Investment Banking and Equity trading results. While one bank noted that deal activity slipped into the new year, other banks reported more than 40% growth in their Advisory revenues and growing transaction pipelines. This suggests a rosy outlook for future M&A activity. Additionally, increased M&A transaction volumes are usually indicative of future debt and equity underwriting opportunities which could lead to further growth in Investment Banking results in the coming quarters. During the fourth quarter we also saw strong Equity trading results, with most banks reporting double digit percentage increases in their equity trading revenues which helped to offset more tepid FICC (Fixed Income, Currency and Commodities) trading results. Furthermore, the buoyant market conditions during fourth quarter helped to boost asset values which led to increased fee income in banks’ asset and wealth management operations.
Second, following third quarter results that included several fraud-related credit issues, the market was waiting for confirmation that these were indeed idiosyncratic events and not a sign of something more ominous. Thus far, banks’ fourth quarter results show stable to improved asset quality trends across both commercial and consumer lending verticals. The level of nonaccrual loans has been stable to improving, criticized loans have decreased, and consumer credit trends remain stable across the full credit quality spectrum. As part of this, forward guidance from several management teams suggests no meaningful change in the asset quality outlook as they look out into 2026. Proposed changes to the credit card landscape from potential caps on interest rates was discussed at a very high level. The consensus view was that this would necessitate drastic changes to existing business models and would likely result in diminished credit availability for certain customer segments.
Third, balance sheet trends remain consistent with previous quarters. Loan growth is gaining momentum, especially within certain commercial verticals including loans to nondepository financial institutions. Deposit growth remains steady in the low single digits. And capital levels are being optimized following revised guidance on new regulatory minimums.
Finally, forward guidance for 2026 has suggested continuity with what we saw in the last year. The outlook for loan and deposit growth suggests a stable economy, consumer asset quality metrics remain in check, and control over expenses remains a big focus of the equity market. Overall, these underlying trends for banks are positive and suggest the continuation of strong fundamental performance. This has been well received by the credit markets with stable valuations at generally tight trading levels even with nearly $40 billion in new debt issuance volumes from the US GSIBs (Global Systemically Important Bank) alone in just the first week of earnings.
As always, thank you for listening and good luck trading.
Key points
U.S. banks' Q4 earnings signal a benign short-to-medium-term economic outlook, with strong fundamentals and stable asset quality across commercial and consumer lending.
Investment banking and equity trading revenues surged, driven by active M&A pipelines and buoyant markets, pointing to continued growth in 2026.
Loan growth (especially in commercial sectors), steady deposits, and optimized capital levels align with banks' confident 2026 outlook, despite regulatory and credit card landscape shifts.