In today's episode, we (Joe Fenech & Kevin Swanson) discuss
Summary:
- A differentiated perspective on activism: acknowledging valid concerns while emphasizing a thoughtful, case-by-case approach to M&A and long-term value creation.
- Why bank M&A outcomes are diverging: how scarcity value, acquiror discipline, accounting, and balance sheet realities are driving very different results across deals.
- Revisiting system liquidity dynamics: how SOFR, bank reserves, and the Fed’s pivot away from balance sheet contraction continued to influence bank stock performance.
- 2025 in review: big banks significantly outperformed, while regional and community banks lagged despite improved operating performance – a divergence we unpack in the episode.
- The implication for 2026 and beyond: a broadening opportunity set beyond the largest banks as stock performance begins to catch up to improving fundamentals.
This session is also available on Spotify or Youtube
Transcript
Spotify Intro
In today's episode, we revisit the topic of activism in the bank sector and the implications for M&A, we also revisit the behind-the-scenes liquidity dynamic that continues to influences sector stock performance, we take a look back at the year in review, and then we take a look ahead and talk about our expectations for 2026 and beyond.
Kevin Swanson
Welcome and thanks for tuning into the Talking Banks podcast. I'm Kevin Swanson, Senior Analyst with GenOpp Capital Management and I’m with Joe Fenech, our Founder and Chief Investment Officer.
Kevin Swanson
Before we start, a quick disclosure. Joe Fenech, Kevin Swanson are employees of GenOpp Capital Management, an investment advisor that maintains exempt reporting status in the state of Indiana. This podcast represents the views, beliefs, and opinions of GenOpp members and does not assert to be complete. The information presented in this podcast is provided to you as the dates indicated and opinions presented may change. You should not rely on this podcast as a basis upon which to make an investment decision. This podcast is not intended to provide and should not be relied upon for tax, legal, accounting, or investment advice. GenOpp’s clients or its members may hold or recommend to GenOpp’s private fund clients the purchase or sale of securities of companies discussed in episodes of this podcast.
Kevin Swanson
So quite a bit to discuss today in the world of banks heading into the start of a new year. Last time, Joe, you talked about two topics that I wanted to revisit today, the first is bank activism and the obvious connection to the M&A activity that we’ve seen beginning to percolate in the sector. This has been an active year for M&A, more so than the past several years combined, and our expectation is that we’ll see even more activity in ’26 and into ’27. Joe, there was a front-page article in the Wall Street Journal last week on shareholder activism in banking, and then a month or so ago, a front-page CNBC article as well. So this is getting a lot of attention, any updated thoughts?
Joe Fenech
Thanks Kevin. Quite a few thoughts on this, enough I think to take up the whole podcast, but as I talked about last time, this topic is always going to get a lot of attention. It’s a sexy topic, right, and I think the natural inclination for generalist investors that haven’t been in the weeds of the bank sector for awhile, is that this is a reason to be interested in this space. And historically, that’s been the right way to think about it. When we’ve seen spurts of activism in banking, the push has been for the underperforming target to consider a sale to a larger partner, better performing partner. The larger banks historically traded at a premium currency, the smaller bank traded at a discount, you didn’t have quite the management succession issues you have today, so you had a balance of capable buyers and sellers, so pushing the underperforming bank to sell could wind up being a very lucrative proposition, big premiums to market, 30-40-50% or more.
Kevin Swanson
And the buyer’s stock would sell off by maybe up to 5% or so at announcement, but by and large, it was manageable and the stock would gradually recover. We’ve talked for awhile now though, even before this M&A wave kicked off, about how we thought this M&A cycle might play out differently than M&A cycles of the past. Without getting too far into the weeds, there are different accounting rules than in the past, there’s now a healthier skepticism about how to value a deal, especially around accretion income. You have interest rate marks in the held to maturity investment portfolio and in the loan portfolio that aren’t reflected in tangible book value per share but they have to be accounted for in a deal when the target’s book is marked to market.
Joe Fenech
For sure, and I would add to that, that stock valuations are lower today than in the past, there is also now as we’ve talked about in the past, a general imbalance of buyers and sellers, there are not as many qualified capable buyers, especially on the community bank side, you have management teams that are aging without succession behind them which is one of the main drivers of that imbalance of buyers and sellers, and you also have a long-term body of evidence that strongly indicates that M&A is very difficult to execute well. So you put all of that together, and the capacity to pay on the part of the acquirors is not what it has been historically, at least not yet, so pushing an underperforming bank to just pursue a sale is not necessarily the lucrative payday on day 1 that it has tended to be in the past. So I think going all in on buying these underperforming banks and pushing them to sell, you’re using an outdated playbook for circumstances today that are completely different than in the past. You can certainly make a lot of money on this consolidation theme, but there’s quite a bit more nuance involved today b/c of these changed dynamics.
Look, the activist case is not difficult to make against just about any bank, apart from say a JP Morgan and a handful of others. Consider this: the regional bank index, the KRE, was $64.50 in May 2018, it’s $64.90 today, 7 and a half years later. And if you go back further than that, you have the huge hiccup in ’08. With our background in writing research on banks, we could make an activist case on just about any bank we wanted to b/c the stocks haven’t gone anywhere, in some cases in decades.
And in some cases, management teams and Boards are very much at fault for decisions that have been made, there is certainly an entrenchment issue where this sector is protected by the regulations around shareholder ownership concentrations, that’s insulated the companies in a way that sort of encourages an attitude of I’m going to do whatever I want to do and there’s nothing really you as a shareholder can do about it. Except for a very brief period during the first Trump administration and then starting again right around now, there has been a moratorium on regional bank M&A. So literally even if your concerns were heard and were acted on, there wasn’t even a viable mechanism for forcing a sale of a bank, b/c it wasn’t allowed. So this diatribe I’m on here isn’t meant to protect underperforming companies, the activists are correct in just about everything they’re saying, but again, it’s not a difficult case to make when along the way you’ve had 2008, 2020 with the pandemic and then 2023 with the liquidity panic, those valleys have made it almost impossible for any bank to show strong stock performance, which is then layered onto the board and management entrenchment issue that is very real.
Kevin Swanson
So if I’m hearing you right, there are legitimate issues and concerns driving the activism, the regulatory environment is such that there is a viable path to force a certain outcome, but that that short-term outcome might not necessarily be what we want to see as shareholders?
Joe Fenech
Yeah, I think you summed it up well. There shouldn’t be a one size fits all outcome here. You have to know each situation, and I’ll get into an example in a minute, but also, look I’m as bullish as I’ve been on the fundamentals of this sector as I’ve been in 20 years, I think the road ahead looks really good. But this sector has also had unexpected calamities occur in 2020, with the pandemic, the liquidity panic in 2023, you had another large bank almost go down in early 2024. So I think you also want to approach this M&A and activist euphoria with a bit of a wary eye given everything we’ve been through. Even if there were huge M&A premiums to be had, which as we’ve talked about, it’s a case by case situation at best where you will see that, what if we’re wrong, and M&A shuts down, or we get a sharp economic downturn, and credit rears its head, or the political winds change.
Now you’re stuck concentrated in a bunch of subpar operators that if history holds, will perform much worse than peers will in a downturn scenario. So I just don’t think the risk/reward dynamic of extreme concentration on that activist M&A theme works through the cycle and it definitely doesn’t work if your macro assumptions don’t pan out like you think. So bottom line, I think there is definitely room for this to be a major theme in an overall investment thesis on the sector, we are certainly involved in it, we talked about the possibility of it long before it actually started happening, but I think you have to first understand how the playbook has changed and second, the prudent approach is for this to be a component of a bullish thesis on the sector, not the be all and end all, because we’re heading into what I think will be a really fruitful fundamental backdrop for these companies and these stocks over the next few years.
Kevin Swanson
So large bank M&A is heating up right now not because an activist is pushing these companies to do something, its heating up because the fundamentals are good, and there is a regulatory window that’s opened up to do these types of deals, and that window in this volatile political environment, might not remain open forever. Are activists and everyone else just sort of going along for the ride?
Joe Fenech
Yes, I think the activist stuff is coincidental with respect to the timing. People forget, Comerica had an activist investor go after them in the past, I think the end result of that was the company announced an expense rationalization plan, and then continued to underperform. But lets use that situation as sort of case study to illustrate the point we’re trying to make here. So in full disclosure, we owned Comerica long in our fund when the deal was announced, we still own it today. We thought the M&A window for regional bank M&A would have opened up a little earlier this year than it did, but everything got pushed back by the tariff situation, Liberation Day, the whole market sort of seized up till the second half of this year.
This is one of the largest non-distressed bank deals of the last two decades. There is virtually no possibility in my view that an activist went public with its stance on this company in July, and Comerica turned around, decided they needed to sell, and had this huge deal announced by early October. Our view that we’ve articulated now on numerous occasions is that virtually every large bank over $50 bil. in assets, and likely even smaller than that, but let’s stick with $50 bil. Just about every large bank we think is going to be involved in some sort of transformational M&A situation over the next few years. We’ve grouped those banks into two categories that we call the hunters and the hunted.
There is a race to add scale, some of that is due to technology, some of that is due to the events of 2023, with the liquidity crisis and Silicon Valley Bank, where the large regionals lost market share to the banks that were deemed to be too big to fail, like JP Morgan, and some of that is due to just the natural course of things, meaning this is consolidation that otherwise would have occurred naturally if not for the regulator-imposed moratorium on large bank M&A and the volatility that made deals very tough to do over the last several years.
And there are only so many of these properties available, about 25 of them left, 6 or so in the markets deemed to be most desirable, that being the Southeast and Texas. And again, the window to do something might be narrow, if we get a pendulum swing in the other direction politically in 2028. So all of these factors are converging at the same time, and that’s why you’re seeing regional bank M&A and that’s why we’re going to see more of it.
Kevin Swanson
And within those groupings, you have franchises that are worth a decent premium, there’s scarcity value to those companies, there are responsible acquirors, and you have acquirors that aren’t as disciplined. A lot of investment themes to play there just within that large regional bank space.
Joe Fenech
Yes, exactly. And if you take into account all of the considerations I laid out earlier, interest rate marks, valuation, capable acquirors, etc., I think Fifth Third paid a reasonable and fair price for Comerica, and that’s talking against ourselves there a bit b/c we owned Comerica. So Fifth Third traded at just about the most attractive valuation of all of the potential acquirors of Comerica. The way this deal was priced, there is no expected tangible book value dilution. The deal is nicely earnings accretive. You get a much stronger management team of the combined company. And you get improved franchise value at Fifth Third with the move into Texas. Since the deal, Fifth Third stock is up 10%, and the KRE, the regional bank stock index, is up 2%. There was another very significantly sized deal with Pinnacle and Synovus, announced in late July of this year. Since that deal was announced, Pinnacle stock is down 8%, and the KRE is up 3%. I would say that most of the deals we’ve seen so far this year more closely resemble Pinnacle’s stock performance than they do Fifth Third’s performance post announcement. I think the takeaway there is if you push Fifth Third or someone else to pay a higher price, now you’re talking about tangible book value dilution, and other risks that are part of the reason why M&A hasn’t worked in this space more often than not over the past 20 years. And you’re going to give up the upside anyway in our view b/c Fifth Third stock or some other acquiror’s stock likely wouldn’t perform as well if the deal was done at a higher price.
Kevin Swanson
And then on the community bank side, the dynamics are much much different than for the regionals. The community banks are more saddled with interest rate marks compared to the regionals, there aren’t as many capable buyers, the valuations are generally lower for the acquirors, and generally speaking, there isn’t quite the scarcity value on the community bank side as there is for the regional banks.
Joe Fenech
Right, so pushing an underperforming community bank to just sell itself isn’t the cure all and it might not even be that lucrative at announcement as people might think. We’re seeing a lot of deals so far this year where really attractive franchises are basically selling at current market prices, for no premium, and people are sort of scratching their heads as to why, and I think the reason is b/c there is a lack of appreciation for how difficult some of these balance sheet dynamics are with the interest rate marks. And that is impacting the prices on these deals.
So again, there is a place for all this stuff, it’s an important investment theme, and we’re certainly playing it. But at the same time, I think we’ve finally got the fundamental backdrop in this sector that we’ve been waiting for for the better part of 15 years. Rates are higher, margins are up, the yield curve is steepening, regulation is loosening up, the economy is in good shape, credit is good, the Fed is lowering rates, and valuations are very reasonable. Regional banks are going to push ROE’s into the mid to high teens range over the next 12-24 months, which means valuations on average should trend over 2x tangible book value. Community banks on average won’t get to quite those levels, but community bank profitability is generally going to improve as well, and valuations will get better along the way. That to me is the real story here. M&A and activism is a component of the story, but I think it’s important to understand the nuances there, and also not to miss the bigger picture, which is a much more significant opportunity.
There is definitely room for M&A, definitely room for some to leave the scene and move into stronger hands, but we need to be very strategic I think as investors in how we approach this.
Here we are at the front end of this new cycle trying to force banks to sell for less than the valuation level that I think a lot of them are going to achieve on their own in the next few years, without the M&A execution risk. The M&A is going to happen in natural course along the way for the reasons we mentioned. I think the Fifth Third / Comerica deal is one of the rare cases of 2+2 equaling 5, but in more instances than not, bank M&A historically results in 2+2 equaling 3 and a half.
I applaud activists for speaking up, I think they’re correct in a lot of the assessments they’ve made, I think it definitely affords some downside protection to these stocks, and maybe makes some banks think twice before they engage in behavior that’s not quite shareholder friendly. But I also think we’ve seen in some recent deal announcements, and I’m not going to name names because I can’t prove it, some companies entering into deals that make them less palatable to a potential activist investor. And we definitely don’t want to see that either.
Bottom line, one size doesn’t fit all as it relates to this topic. There isn’t some unicorn universe of banks all trading at 3x book that are just waiting in the wings to send us into a bank M&A frenzy that’s going to prove profitable for an investor just by participating in it.
Kevin Swanson
Ok, moving on, we wanted to provide an update on a topic we discussed last episode, which is the behind-the-scenes liquidity dynamics that we would argue were more impactful to sector stock performance in recent months than has been commonly thought. So just a quick recap, we saw a spike in SOFR beginning in the early September timeframe, that peaked in mid October, right around the time that the bank stock index fell roughly 6% in a single day, that was also right around the time that a few significant credit issues surfaced among the regional banks. Also, recent data released by the Fed shows that bank reserves held at the Fed dipped considerably, that started over the summer, and that decline accelerated through November. So system liquidity has been an issue, we think it’s been a significant issue for the stocks, and we think it forced the Fed into some of its recent pronouncements, which are just as impactful if not more so than the decisions on short term interest rates. Joe, any updated thoughts on that front?
Joe Fenech
Yep, so I think the Fed’s announcement on basically restarting QE-lite I’ll call it with the December meeting, was an acknowledgement that the system liquidity issues were more serious than many people had appreciated. Part of that was the government shutdown, which was obviously a temporary phenomenon but the big part of it was QT, and the effects that was having as the Fed has continued to shrink its balance sheet over the past few years. So the Fed first announced the end of QT in late October, they said it would end on December 1, and then in December, they took it further and said it would be doing what we interpret to be a form of QE, or expanding its balance sheet.
Bank stocks had already started to recover from the September / October swoon but ratcheted higher on this news, which was of course attributed to the rate cut, but we think the tell was what happened to SOFR, which we have said we think of as sort of a proxy for the efficacy of the plumbing of the financial system behind the scenes. SOFR went from 4.31% on October 28, to around 4% on December 8, and then almost within a day after the Fed announcement went to 3.66% on December 11, so it declined by 65 basis points in basically 6 weeks.
The bank stock index through this process went up about 13% from the Fed meeting in late October to the Fed meeting in early December. And then interestingly has been pretty weak into year-end since around December 10. SOFR, after bottoming out, started to tick up higher again after that, and it’s settled in in the low to mid 370’s. So still some volatility there, evidencing to us that those back end plumbing issues are improved, but not quite completely resolved. But we can’t emphasize enough that the flip of the switch from several years now of QT to no QE-lite is a paradigm shift, it’s big news for this sector. And it came about because there were some troubling issues behind the scenes, and that has had more of an effect on sector stock performance these last few months than is commonly appreciated.
Kevin Swanson
Ok, so these are complex topics and we probably underestimated how much time it would take to really walk through them in detail, but let’s move on. The year in review for banks. Let’s talk about the things that were aligned with our expectations and then things that ran counter to our expectations for the year, and then we can talk about the implications of that for this year ahead.
Joe Fenech
I would say, broadly speaking, that fundamentals inflected positively the way that we hoped they would, but that fundamental performance has not yet been fully reflected in most bank stocks as of yet to the extent that we maybe would have thought heading into ’25. So essentially it’s a timing mismatch, which I’ll take all day along over the reverse, which is that we were expecting the fundamentals to improve and that turned out to be either wrong or something happened to derail the thesis.
Kevin Swanson
When you say “most bank stocks”, that doesn’t include obviously the very largest banks, which have performed extremely well.
Joe Fenech
Yes, that’s a good point. Citigroup was up over 65% in 2025, JP Morgan about 35%, Wells Fargo about 34%, Bank of America 26%. A lot of talk about Mag7 and AI, but as a group you would have been better off in the big banks, just terrific performance by the big banks in ’25, both fundamentally and stock performance. And then you look at other headline large ap financial stocks, like Goldman Sachs, Morgan Stanley, Bank of New York, each up between 40 and 50% on the year. But I think a common misperception by casual observers of the space is that everyone must have looked as good as the headliners. But when you dig deeper, the regional bank index, the KRE, was up about 8%, the NASDAQ Bank Index, which is more community banking oriented, was up about 6%. So the big banks crushed the overall market, and the little banks significantly underperformed the overall market, which is an interesting dichotomy within the same sector.
Kevin Swanson
When we talk about the biggest banks though, isn’t it fair to say that the fundamental turn came much earlier for the big banks. They’ve been performing well fundamentally for a few years now, even going back to the liquidity panic in 2023, the largest banks were beneficiaries of the deposit flight out of the smaller banks. JP Morgan outperformed the S&P that year in the midst of a banking crisis. And these bigger banks were just naturally more liquid in terms of their balance sheets, they were asset sensitive, so they actually benefited as rates moved higher, which was not the case for most smaller banks, and they had capital markets and trading businesses that did well, so they weren’t as tied to the yield curve, which was as deeply inverted and for a longer period that at any time in over 40 years. And the yield curve only dis-inverted fairly recently.
Joe Fenech
100%. Layered on to that, the biggest banks were also the most direct early beneficiaries of the deregulation of the sector. So remember, the biggest banks were required to hold much more capital after Dodd-Frank, so they had a significant amount of excess capital. Kevin, you found that great statistic you calculated, which shows that JP Morgan has excess capital that was equivalent to the size of PNC Bank, which is the 6th largest bank in the country. That’s mind boggling, excess capital on JP Morgan’s balance sheet alone equaled the size of one of the largest regional banks. So as those capital rules were relaxed, even if nothing gets better for the big banks fundamentally, their return on capital goes up over time b/c the denominator of the equation decreases. And some of them were already doing mid to upper teens ROE’s even with all the excess capital. So even though the last few years have been characterized by a lot of headlines around problems at banks, I’d argue that things have never been better for the biggest banks in the country, they’ve never been stronger, they thrived through the inverted yield curve period b/c of how their balance sheets were structured and b/c they had offsets to traditional spread-based banking income, and so the macro backdrop has actually really provided a tailwind, whereas it’s been a headwind for just about all other banks.
Kevin Swanson
And I think what’s interesting to note there is that even though fundamentals have been great for these banks for awhile, as recently as January 2024, so exactly two years ago, you could have bought JP Morgan for 11 times forward earnings, and Wells Fargo and Bank of America for 10 times forward earnings. Today, JPMorgan sells for almost 15 times forward earnings, Wells is almost 14 times, and Bank of America almost 13 times. That’s pretty astounding multiple expansion in just two years.
Joe Fenech
Yeah, so I think that’s how the experience of the last few years ties in with what we see ahead. Regional banks fundamental performance really only inflected this year. Remember as recently as March 2024, Flagstar, formerly New York Community, was rescued and recapped by Steve Mnuchin, and that whole first half of the year was dominated by fears of commercial real estate Armageddon. That was less than two years ago. And then the yield curve finally disinverted in September 2024, and then steepened in 2025. Deregulation also benefits for sure that next tier lower of banks in the large regional category, and that’s only just starting to play out.
So what we see happening is all of these regionals are providing medium term ROTCE targets in the mid to high teens. So the tailwind of improving fundamentals is happening for these banks as well, it’s just happening on a bit of a lag to what we saw with the largest banks. And it just takes time for that improved fundamental performance to be recognized in the market, just like it was for the biggest banks. So if you look out to 2027, these large regionals on average are trading just under 10 times 2027 earnings. And these are the regionals over $50 bil, or so of assets. The smaller regionals, $25 bil. or so, trade at 9 and a half times 2027. So what you’re going to see this year we think is a broadening out of that tailwind, you’re going to see a re-rating of these banks back closer to historical norms. A year from now, let’s assume they trade at 12 times ’27 earnings, which is not a heroic assumption by any means, you’re looking at over 20% price appreciation for the large regionals, and about 25% for that next layer down, the smaller regionals. And that’s without any increases to estimates for this year and next, which is definitely possible if not likely.
Kevin Swanson
And for the community banks, I think it’s fair to say that for now, we’re being a little bit more selective. Fundamentals are improving for sure, and these stocks are extremely cheap, most are trading somewhere between 8 and a half times to 9 and a half times 2027 earnings. But it’s going to take a little more time for investor sentiment to warm to these stocks, just like it’s taken more time for investors to warm to the regionals compared to the largest banks.
Joe Fenech
Yeah, but I do think a rising tide is going to generally lift all boats, more so than what we saw in ’25, but I think you’re right, the real opportunity there is when the regional banking index, which is dominated by some of the larger companies, once that settles in, there’s going to be a tremendous opportunity in sifting through the smaller names that may have been left behind. And that’s where you’re generating very significant alpha b/c you’re getting pops in these smaller off the run names that aren’t in the index, while the index is sitting there flattened out.
That’s similar to what we saw in the mid to late 2010’s – there was a recovery period after the Great Recession in 2008, led by the largest banks, and then things settled in, but there was a long period there of opportunity sifting through smaller under the radar type names.
Kevin Swanson:
On that note, we’re going to wrap up. Thanks to everyone for listening and Happy New Year!
Disclosures:
Of the individual stocks mentioned, our investment fund currently has positions in Comerica Inc (CMA), Citigroup (C), and Bank of America (BAC).
The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any security. This information does not purport to be complete, is subject to change, and is qualified in its entirety by the definitive offering documents related to any private fund managed by GenOpp Capital Management LP. All time-sensitive references are made as of the date set forth above, unless otherwise expressly indicated, and there is no obligation to update any such reference. The delivery of this information does not imply that the information is correct and no representation or warranty is made as to the accuracy of any information contained herein. This information is not a recommendation to buy any security and does not constitute any form of legal, tax, investment, or other advice.
