Through the QPD Lens: Banking in Transition

Cambiar Investment Principal Ania Aldrich recently attended a major U.S. banking conference, meeting with executives from institutions across the market-cap spectrum, from money-center giants to regional and community banks. In this Q&A, Ania shares key takeaways from those conversations, including how potential deregulation could reshape profitability, the growing threat of private credit, and where merger activity may pick up next. She also discusses emerging themes in technology, credit quality, and deposits, offering her perspective on which parts of the banking sector may present the most compelling opportunities for value investors heading into 2026.

 

Q: You just returned from a major U.S. banking conference. What were some of the most prominent themes or debates you heard among bank executives and investors?

Macro is always a big topic, with wide-ranging questions that include the health of the U.S. economy, inflation, state of the consumer, etc. All of these inputs can potentially impact credit results for banks, so it’s good to hear management views.

 

Q: How could a lighter regulatory environment impact banks’ profitability and competitiveness, especially for smaller and regional institutions?

There was a lot of discussion on the potential impact of deregulation and how it would impact the banking sector. One big topic was the potential for higher returns should required capital levels decline, especially for the larger banks. Since the GFC, banks have been required to hold more capital, with the prior Administration proposing another increase. Any relief on this front would lead to higher profitability for the banks.

The regulatory backdrop is likely to be more favorable to banks, as regulators strike a balance between maintaining a sound financial system and a competitive one; the implication is a less intrusive regulatory regime, which can lead to lower costs and fewer restrictions on growth (including M&A). This, in turn, may make banks more willing to lend, particularly to smaller businesses.

On the other hand, the new regulatory backdrop can also lead to broader competition for banks, as less stringent regulatory frameworks may allow increased competition from outside the banking sector.

 

Q) The so-called “Basel III Endgame” rules have been a big topic this year. What’s changing, and how might that shift the balance between the largest banks and the rest of the industry?

Basel III Endgame, also known as B3E, is a significant set of reforms related to the U.S. bank capital regulation; it is aimed at strengthening banks’ capital levels in a more “risk-sensitive” framework and reducing reliance on internal bank models for risk, which vary broadly.

The original proposal called for ~16% increase in required capital for the largest banks, on top of the significantly higher capital requirements post the financial crisis. Higher capital standards could have a meaningful impact on banks’ lending capabilities.

The new proposals call for a more capital-neutral impact, leaving banks with substantial excess capital that can be deployed into growth – organically or via M&A. This lower capital requirement is one reason why the mega-center banks have outperformed regional banks this year. Another reason for their outperformance, in terms of stock pricing, is their exposure to capital markets, which have seen a major revival post-Liberation Day.

 

Q) Private credit is taking more market share from traditional banks. How are banks, large and small, responding to this growing competition? And does it pose any broader risks to the financial system?

Private credit companies have been around for a while, but their growth accelerated meaningfully post-GFC, filling the void as regulators tightened capital standards for banks. By some estimates, the private credit market is now ~$3 trillion, vs. ~$13 trillion for the U.S. commercial banks. A key concern for the private credit market now is the quality of underwriting, given the excessive growth.

The primary addressable market for private credit had historically been smaller companies that were unable to secure bank loans. Yet private credit has now expanded into a much wider asset pool, including asset-backed financing, consumer unsecured lending, auto loans, credit cards loans, and structured credit. The key concern is rapid growth and less-regulated underwriting standards, which could lead to higher losses than their regulated peers. We have not really gone through a true credit cycle since the GFC, so it is hard to know how well these private credit funds will perform. Although these loans fall outside of the banking system, banks do have exposure to the space as they provide credit to many private players. It is an area where regulators are paying more attention, given the increased assets and impact on the overall soundness of the financial system.

 

Q) There’s renewed interest in bank mergers and acquisitions. Are we entering a new wave of consolidation? What types of deals make sense in this environment?

The current Administration and the new banking regulators are definitely more open to bank M&A. We have already seen deal approval times shrink significantly, which is encouraging banks to pursue more deals. Scale is an important factor, given increasingly competitive pressures and the need for IT spend to keep up with the ever-evolving modernization process. Big banks generally have more capital to address these challenges. The first half of 2025 saw a noticeable increase in merger activity, and we expect this trend to continue amid a favorable regulatory backdrop.

 

Q) Many high-quality banks are still trading at what look like depressed valuations. What’s keeping investor sentiment muted, and do you see opportunities for value-oriented investors here?

As discussed earlier, the large money center banks have outperformed both the market and the regional bank sector, up on average ~30% vs ~3% for the KRE Regional Bank Index. With mega cap banks trading now on average around 13x PE vs 10x for the regional banks, we find the regional banks more attractive assuming the economy continues to perform well. The improved regulatory environment also bodes well for the regional banks, as the increased potential for M&A will result in increased scale and efficiency. With the forward curve pricing in 3 – 4 rates cuts through F26, the regionals should benefit from increased lending and lower deposit costs, resulting in higher margins and profitability.

 

Q) AI and digital transformation were big talking points at the conference. How are banks using these technologies to cut costs or improve operations, and is this a space where smaller banks can compete?

AI is getting a lot of focus at banks, both large and small. Banks are using AI across many functions – examples include customer service, underwriting, fraud detection, and back-office efficiency/training. Larger banks do have more capital to invest across different initiatives, giving them a competitive advantage early on.

The cost-saving opportunities could be significant, ranging from 10% to 30% by some estimates. AI-driven, data-enabled personalization could drive better product recommendations and greater growth potential. Many banks are also exploring the use of AI to improve risk management and credit quality by generating early warning signals for delinquency and defaults. The potential applications are numerous, and we are still very early in this development.

 

Q) With the rise of fintechs and stablecoins, deposits are becoming more competitive. How are banks thinking about deposit growth and stability in this evolving environment?

Deposit competition has increased meaningfully on the back of higher rates, and has been further exacerbated by the mini run on deposits fiasco from a few years ago that caused the Silicon Valley Bank failure. Banks were forced to increase what they pay customers on the deposits while pursuing primary relationships. The more products/services a bank can cross-sell to its customers, the less likely a customer is to switch to a different bank. Fintechs can offer higher deposit rates if they want, but in general, their focus is on a particular customer base, and their product offerings are not as robust.

Stablecoins potentially present another challenge for banks, but at this point, there are a number of key unknowns, such as the nature and the scale of the adoption, regulations, and market structure. Stablecoins are basically digital cash equivalents which use blockchain technology as their platform. If more users elect to keep more balances in stablecoins vs deposits, this could present a potential risk to banks’ funding. Regulators are carefully evaluating this scenario, and regulations would need to evolve in order to keep the banking system stable.

At present, stablecoins are not allowed to pay interest on balances the way banks pay interest on your deposits. As such, moving money into stablecoins may not be an attractive proposition, especially if the usage remains fairly narrow. At the same time, banks are not standing still. Many are investing in this initiative, with some banks (e.g., J.P. Morgan) introducing their own tokenized deposit coins, while others provide custody services for the reserves backing the stablecoins. These initiatives will likely enhance payment capabilities, but still face a material execution and regulatory risk.

 

Q) Credit conditions have remained surprisingly stable despite economic uncertainty. Are there early warning signs that suggest risks could be building beneath the surface, particularly among smaller or regional banks?

Credit conditions generally remain stable with some pockets of weakness. Higher interest rates and slower economic growth are definitely putting pressure on certain segments of the economy. Lower income consumers are also under greater stress from higher rates and higher inflation. We have seen increasing delinquencies in auto loans, as well as recently publicized corporate bankruptcies in the space. Banks generally have improved their underwriting standards, so credit thus far has generally held up very well. The Fed remains poised to continue easing, which should provide relief via lower funding costs.

Smaller banks have more exposure to commercial real estate than the larger banks, and although this asset class remains under stress, we are several years into this cycle, with price discovery well established and more activity likely to continue.

 

Q) Taking everything you heard at the conference into account, where do you see the most compelling opportunities across the U.S. banking landscape, from the largest franchises to the smaller, underfollowed names?

All banks should continue to do well if the economy remains intact. Lower interest rates, combined with certain aspects of the “One Big Beautiful Bill Act,” should provide some acceleration of economic activity. The employment picture is still relatively strong, which should allow the consumer to continue to spend and pay their bills. Banks are in good position to benefit from this continued growth backdrop, which should also improve investor sentiment towards the space – resulting in higher multiples.

Regionals should see somewhat of a catch up, given historically attractive multiples; that said, we also expect the large money center banks to continue to benefit from elevated capital markets activity, improved regulatory backdrop finalization and a steady overall economic backdrop.

 

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