Strong bank earnings in North America and Europe contrast with growing investor concerns about 2027.
Despite strong earnings and healthy credit markets, bank investors are increasingly concerned about the sector’s 2027 outlook.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Morgan Stanley, UBS Group AG, HSBC Holdings, and Deutsche Bank AG have cited macroeconomic volatility and political uncertainty.
While profits at nearly all these banks are up from a year ago, doubts are emerging about the payoff from tens of billions of dollars in data center financing and about the prospect of further interest rate hikes.
A year ago, investors were more optimistic about the sector ahead of the Federal Reserve’s December 2025 interest rate cut. Data center spending was viewed as a growth opportunity, but it is increasingly seen as a potential risk if investments in AI fail to deliver expected returns.
On the plus side, yields on 10-year U.S. Treasury notes fell below 5% in recent weeks after exceeding that level in the third quarter, and the Fed held interest rates steady at its October meeting. Banks continue to benefit from robust economic activity, active dealmaking and strong wealth management businesses.
“It is a very, very favorable environment for banks,” said Ian Lapey, manager of the Gabelli Global Financial Services Fund (GFSIX), which holds several U.S. banks, including First Citizens BancShares Inc. and Citigroup Inc., as well as European banks such as Barclays, Banco Bilbao Vizcaya Argentaria S.A. (BBVA), ING Groep N.V., Banco Santander and Société Générale.
“You’re seeing strong revenue growth across the board, including fee income, investment banking revenues, advisory revenues, and net interest income, which is also growing,” Lapey said. “The credit environment has been really benign for several years.”
Most banks are also buying back stock, a sign of confidence in the economy. Employment levels and consumer spending in the U.S. have remained resilient despite frustration over rising living costs.
Challenges for 2027
Lapey said banks face a more challenging environment in 2027 as revenue growth normalizes and risks associated with certain types of debt rise. Potential cracks in credit quality could emerge, especially for U.S. banks, amid concerns about data center financing and exposure to private credit, he said.
While U.S. banks have greater exposure to private credit and AI data-center financing, European banks are better positioned to generate cash, repurchase shares, and increase dividends, he said.
Among the banks’ forecasts, UBS expects “a more typical sequential seasonal moderation in transaction volumes” in the coming year, and its current global banking pipeline is expected to help it increase revenue sequentially, assuming constructive markets.
JPMorgan Chase, which raised its net interest income outlook, said it expects “pretty stable” corporate credit conditions.
“Obviously, there are issues out there, and we’ll have to see how they flow through — the performance of our borrowers, energy prices, fuel inputs, and higher rates. These are all things that will create challenges in different pockets of the economy,” JPMorgan Chase CFO Jeremy Barnum said on the bank’s call with analysts. “It’s very early, obviously, but in general, we think corporate balance sheets are in quite good shape. There’s been resilience, but there are a lot of pressures building up. So, we’ll have to see what happens.”
Such uncertainty has weighed on bank stock sentiment, prompting investors to react more negatively to results that fall short of expectations.
NatWest shares fell nearly 9% on Oct. 30 after the bank reported nearly a 100% increase in impairment charges, which bit into profits.
“This is sort of a classic Wall Street overreaction,” Lapey said. “They actually put up a return on tangible equity of 21.6%, which makes them among the most profitable banks in the world. I’d say the outlook for that company is quite good.”
Ian Lapey of Gabelli Funds says banks’ Q3 results revealed solid businesses, but the sector could face more headwinds next year.
Steve Gelsi is a contributing writer based in the U.S.
