As we’ve done in previous quarters, the first take of the quarter was written by Robert Albertson, one of the better tea leaves readers I know.
Overview: While the vast bulk of third quarter bank operating results were strong and generally above estimates, a handful of credit issues has driven bank stock valuations lower, some sharply so. Most investors have succumbed to the fear that this could be an industry-wide alert, but the issues that have surfaced so far are clearly idiosyncratic in my view.
Two of the notable credit losses occurred in the Non-Bank Financials sector, which is a very broad category that includes REITs, certain types of securitizations, insurance subscription lines, payments processors and other historically low risk forms of lending. Exposure to high-risk NBFIs appears quite low as a percentage of total loans. A third dramatic hit came in an outright but apparently sophisticated fraud, involving duplicate pledges of security.
There may be other such exceptionals but I do not see them as endemic to bank credit overall. At the same time, most were showing meaningful declines in nonperforming assets and credit becoming even more pristine for this stage of the cycle. Broader macro issues still deserve attention, however, particularly in both damage to tariffs and a weakening labor force which will take longer to assess.
Forward guidance was primarily limited to the fourth quarter, as expected, but in their remarks managements gave some glimpses into 2026, indicating helathy loan momentum in loans, deposits and revenues.
Macro environment: Loan growth continues to be driven primarily and heavily by the commercial and industrial category, albeit line utilization hasn’t moved appreciably so far. There is still reportedly client caution over the weak labor market. Tarriff and tax uncertainties have waned some but are still there.
Consumer momentum remains lackluster, except for credit cards and a few banks. Banks indicate consumer spending appears moderately positive and borrowers remain healthy.
Commercial real estate continued down for most but, perhaps surprisingly, some are calling for an imminent rebound and a handful did show some recovery in outstandings already. CRE is expected to show an up year in 2026 as prior down-sizing completes. Average total loans, while mostly up in the sequential quarter, were end-of-period down which I consider somewhat a seasonal aberration. Investment securities were only up lightly for most.
Margin & Net Interest: Net interest margins were mostly slightly down again but nothing dramatic. Fixed asset repricing is the main positive while commercial loan spreads are experiencing more competition and burdensome consumer deposit mix shift, which appears ready to retreat. Most assume NIMs are said to rebound a bit in the fourth quarter and will continue to expand in 2026 according to recent guidance. This guidance generally assumes two Fed rate cuts this year followed by further decline in 2026.
Noninterest Income & Expenses: Noninterest income was very robust across the industry, particularly so from capital markets, wealth management, consumer fees and payments. This robustness, against consistently and tightly managed expenses, assured most are delivering operating leverage. This leverage appears consistently able to produce 100 basis point advances and as high as 200 to 300 for some.
Credit & Capital: Excluding the aforementioned idiosyncrasies, loss provisions and chargeoff ratios continued to hover near-record lows, with only minor swings between reserve releases and reserve builds. It is reasonably safe to say the concern over office buildings has run its course and has been largely addressed.
There is also broader discussion favoring share repurchases and managing CET1 capital ratios slightly lower. Most analysts have asked thoughtful questions regarding regulatory relief. Managements are still waiting and seeing on Basel’s Endgame, which should resolve over the next several months. However, some bank managements are hopeful that regulatory Matters Requiring Action (MRAs & MRIAs) have reached an unsustainable and unnecessary flood level and regulatory relief may be in the offing. Many quantitatively cited exceptional personnel and meaningful cost burdens that can be removed without endangering safety and soundness. M&A approvals are now down to six months.
Consolidation: There was natural questioning around potential mergers and acquisitions with the latest round of announcements. While more is undoubtedly to occur, I was mostly impressed with how managements wisely responded in philosophy. Many are seeing organic potential well above and sufficient to the immediate future. There can be clearly more geographic expansion, but this will be primarily driven by consumer deposit acquisitions via solid branch systems available for acquisition. Commercial expansion will continue to be better served by adding relationship teams geographically, not via whole-bank deals.