Tuesday, September 22, 2026

Guest Post: Financial Markets and Economic Update for the Third Quarter 2026

Bond Vigilantes

When the bond market leads the Federal Reserve, they usually must follow or face the wrath of the bond vigilantes. They’re back! The Fed Funds futures markets had a 94% chance of a rate hike at the September 16^th FOMC meeting. The 2-year Treasury yield rose by 61 basis points since the end of the second quarter; the 10-year Treasury rose by 60 basis points and exceeded 5.00% as of now. The FOMC unanimously raised the Fed Funds rate by 25 basis points to 3.75% to 4.00%, for the first hike since July, 2023. Be careful what you wish for as the Fed rarely stops at one single increase in Fed Funds once they start tightening.

The bond vigilantes have been protesting all quarter, but especially in September. They pushed rates up to combat inflation uncertainty, high oil ($102), gas ($4.47), and diesel ($6.44) prices because of the Ukraine war and Iran conflict (or should I call it a standoff?), and rising commodity prices (supporting the dollar). Global debt is rising as capital investment for AI and manufacturing plant buildouts increases demand for long term debt. The federal government deficit has pushed Treasury issuance up with $40 trillion+ now outstanding. Or maybe the vigilantes are just protesting Maria Bartiromo’s exit from Fox News on September 3rd.

So, bond vigilantes, what’s next for the 10-year Treasury yield? 4.50% or 5.50%?

Inflation

With the new Fed Chairman, Kevin Warsh, now in place, I am watching Fed news conferences again. When asked why the Fed projections still show it would take two years to get to the PCE goal (as I’ve been complaining about for years), Warsh almost laughed. He simply said inflation is too high and we must get to the 2.0% goal in a quicker, more timely fashion. At 3:00, he answered a question, snatched his papers, and abruptly walked out.

I agree that inflation measures year-over-year are too high, as evidenced by CPI (August) at +3.4%, PPI (August) at +5.4%, and PCE (July) at +3.7%. Core CPI (August) was at +2.4% (which is at the implied target), core PPI (August) at +4.6%, and core PCE (July) at +3.3%. In the 2s for all would be infinitely better.

There are measures that are much lower- Truflation, which is a set of indices developed in December 2021 to replicate CPI and PCE, but digitally in real time for 13 million goods and services on a daily basis, eliminating the survey process for thousands of prices and delays of the standard CPI and PCE measures. As of September 18^th, Truflation y-o-y for CPI was +2.4% versus the standard CPI at +3.4% and for PCE was +2.5% versus the delayed +3.7%. Truflation has been under 3.0% for all of 2026. For Bloomberg users, the ticker is TRUFUS44. Let’s hope the Fed task force on inflation at least considers this metric. What do you think about Truflation?

Rogue AI

We’ve heard about several instances of AI models breaking their containment or testing environment and going where they should not go- to the Internet and onto companies’ websites. Open AI’s agent escaped the test environment, got onto the Internet, and hacked the servers of Hugging Face. Google’s Gemini hacked and accessed three real companies’ websites by obtaining or guessing passwords. Anthropic’s Mythos and Meta’s Llama both broke out of their containment and Mythos uploaded malicious software to a site. Alibaba’s AI model found sites on the Internet and started mining cryptocurrency. What next? It’s clearly a risk that companies and individuals must contemplate sooner rather than later.

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- The up and down pattern of 2026 continues. August’s LEI was -.1%, July was +.2%, and June showed no change. In the past 42 months, 33 months were negative, 5 months had no change, and 4 months were positive (all in 2026). Recent trends are not telling us much about future growth. The many months of downturn over the past 3.5 years didn’t tell us much about growth either, as the LEI kept pointing to recession that never came.

Real GDP- Speaking of growth, it’s been holding in there, with 2Q26 at +2.1% and 1Q26 at +1.5%. As far as the 3Q26 projections by the Atlanta Fed, GDP Now stands at +5.1% as of now.

Moody’s Beige Book Index- The most recent report for September showed 10 districts with increasing growth and two with unchanged growth. Philadelphia is increasing this time. The Moody’s Beige Book index is higher again in September at 63.9, compared to 44.4 in July and 36.1 in June.

M2 Money Supply- M2 y-o-y growth has been solid. July was +5.4%, June was +5.3%, May was +5.4%, and April was +4.5%. This increase in money supply is supporting GDP growth.

Productivity- This measure improved in 2Q26 to +1.4%, following +.8% in 1Q26. Unit labor costs were modest at +1.2% and +1.3% in 2Q26 and 1Q26, respectively. Productivity is at a level now that can support a portion of wage increases.

Housing- Prices continue to moderate on a y-o-y basis. Case Shiller was +2.1% in June versus May of +1.6%. FHFA for June was +2.3% versus May of +2.4%. Moody’s HPI was +1.9% in July versus June of +2.2%. Existing home median sale prices rose +1.6% in August.

Federal Reserve Task Forces

“It’s been a long time coming but I know a change is gonna come.” Sam Cooke

Kevin Warsh is forcing change at the Fed. Five task forces were created to study their subjects and report back by year-end 2026 at the latest. These task forces are: 1. Communications (i.e. no press conferences!), 2. Balance sheet policy and management, 3. Quality and timeliness of data sources, 4. Productivity and costs including technology and AI, and 5. Inflation framework.

September 11^th

I can clearly remember that fateful day 25 years ago. The feelings of dread, sadness, horror, and helplessness are still there. The feeling of deep loss remains over the loss of my friends at Sandler O’Neill who were killed that day. They were so proud of their offices on the 104^th floor of the South Tower. Each year, on September 11^th, I think of them and vow to never forget them. They went to work that morning and had no idea of the tragedy to come. So here goes- Stacey, Gus, Herman, Chris, Jeff, Kevin, and Judd. And to Anthony, who I met after the tragedy and who was not there that day, I think of you as well. God bless you all.

Thanks for reading! As always, I appreciate your support! DLJ 09/20/26

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes. The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed. The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice. The author cannot provide investment advice but welcomes your comments.

Thursday, September 17, 2026

Deposits: Let's Talk

According to the Independent Community Bankers of America (ICBA), stablecoin wallets could suck $1.3 trillion, with a "T", out of the insured deposit system. Predominantly from banks. I'm thinking the ICBA would care less about deposits leaving credit unions.

The concern and the headline number is that if stablecoin becomes a widely adopted payment rail, like ACH, wires, and Visa/MC, and stablecoin issuers can offer rewards, then businesses and perhaps individuals will park more of their cash holdings in a stablecoin wallet. The other payments rails flow through banks, so the "wallets" are essentially the customer operating accounts.

Do I think the great vacuum sucking machine of deposits leaving banks for stablecoin wallets will come to fruition? Probably not, at least not at the levels projected. And the Clarity Act recently failed to pass the Senate, due in part to not closing the rewards loophole, more like a tunnel a freight train could pass through, left in the Genius Act that forbids the paying of interest to stablecoin providers but does not forbid rewards.

And bankers are beginning to adapt. The Clearing House is developing a shared, bank‑led platform for clearing and settling tokenized deposits. It is designed to keep customer funds inside regulated bank accounts while adding on‑chain speed, programmability, and 24/7 settlement. A cadre of bank trade associations are doing the same in an initiative called Bank Chain.

Even if the $1.3T is a huge miss, I think we're missing where there is titanic risk. The alternatives to bank deposits. Before I elaborate, let's look at past behaviors during different rate and pricing transparency in the recent past.

The above chart is a macro look at the spreads delivered by asset products, namely loans and investment securities, and liability products, primarily deposits, during different rate scenarios. The dotted line represents the Fed Funds Rate. The orange line, asset spreads. And the green line, liability/deposit spreads. Many of my readers know that my firm measures product profitability for community financial institutions on an outsourced basis and that is where I am getting these statistics from. Our outsourcing client averages.

In 2006, when the Fed Funds Rate was 5%-5.25%, as it was in 2023, deposit spreads actually exceeded asset spreads although deposits have negligible credit risk. At that time, there were nearly 100,000 bank branches nationwide.

Then came the Great Recession and the Fed Funds Rate fell to zero. Deposit spreads plummeted and lingered around 1% for the remainder of the zero-rate environment until the Fed started tightening in 2017. The number of bank branches plummeted to around 70,000. Why? Deposits were less profitable. Therefore branches were less profitable. And the declining number of customer visits to branches made them easy targets for consolidation. And as it turned out, there was little deposit attrition from consolidated branches.

Because customers did most of their transactions online or on mobile. No branch. No problem.

At peak Fed Funds Rate in 4Q07, average deposits per personal money market accounts were $55,000. After it went to zero, that number declined to its trough of $45,000 in 4Q08. Perhaps it was households burning through cash. But once rates went to zero and stayed there until 2017, personal money market average balances per account methodically climbed to $93,000. Why not keep it in an FDIC insured account with immediate availability if rates were minimal no matter the instrument of choice?

When rates shot up again in 2022, something different happened. At Covid's start in 1Q20, average balances per account was $94,000. Two years later, 1Q22, the average balance was $131,000. Zero rates. Government stimulus. Economic uncertainty.

Then inflation and the Fed's rapid response to try and curtail it in 2022 and 2023 by raising rates faster than at any time in recent memory. What happened to the average balances per personal money market accounts? They plummeted from its 1Q22 peak to a 3Q24 trough of $76,000 per account, a 42% decline. A similar thing happened in interest bearing retail checking accounts. Where did the money go?

The below chart shows that some flowed into CDs, as the proportion of CDs to total deposits shot up from around 15% to over 30% during the rates up period.

That would be the good news. Lower cost interest bearing checking and money market balances flowed to higher cost CDs. Still in our bank. But that isn't the whole story. Not by a long shot.

The above chart shows the Breckenridge ski lift rise of money market mutual fund assets, a clear alternative to bank accounts. Sofi Bank, a neo bank that has high yielding assets (mostly student loans) funded by high-cost deposits, grew from $155 million in deposits in 2022 when it acquired a small California bank to $47 billion in deposits today. Where did those deposits come from?

So my concern is less about where the stablecoin deposit headwind will take us, and more about where neo banks and alternatives to bank deposits will take us if we continue to manage our funding like we have done in the past. Because if we keep rates low during Fed tightening periods, people will seek alternatives, like they did in 2022-23. And they won't even call us to complain.

How will we change our funding strategy to mitigate this risk?

~ Jeff

Saturday, August 22, 2026

Key Factor Why the USA Became the World's Super Economy? Banking.

The Bank of North America came into being during the darkest years of the American Revolution. By 1781, Congress was nearly bankrupt, the Continental currency had collapsed in value, and the government lacked a reliable way to finance military operations. Robert Morris, the newly appointed Superintendent of Finance, proposed creating a national bank to stabilize public finances and support the war effort.

Morris drew heavily on ideas previously suggested by Alexander Hamilton, who had advocated for a national bank as early as 1780. Congress approved the plan on May 26, 1781, granting a federal charter to the Bank of North America, which opened in Philadelphia on January 7, 1782.

The bank failed to succeed as the nation's first central bank for many reasons, among them was a weak central government, then formed under the Articles of Confederation, resistance to the monopoly power a central bank would wield, and Pennsylvania not recognizing federal authority to form a bank. It subsequently revoked its charter and re-formed it as a private bank.

But it was successful in financing the Independence War, facilitate tax collection and government payments, and improve confidence in the new nation's emerging finance system. Hamilton would go on to form Bank of New York (America's oldest surviving bank), and support a subsequent national bank operating under the Constitution, the First Bank of the United States.

In his efforts he was opposed by many luminaries such as Thomas Jefferson and James Madison, who felt such a bank with monopoly power will infringe on states' rights.

Today, most historians view Hamilton as the father of American finance. While the First Bank's charter expired in 1811, the concepts he championed, including federal debt management, national credit, central banking functions, and a strong financial infrastructure, heavily influenced later institutions such as the Second Bank of the United States and eventually the Federal Reserve System established in 1913.

From Hamilton's wisdom, we have the highly decentralized banking system of today. One that is becoming more centralized as a result of consolidation, and centralized regulation that is interfering in the localized distribution of capital so important to our nation's growth.

How did banking make the United States an economic powerhouse?

Economists often describe finance as the mechanism that moves savings from households to productive investments.

Research shows that well-developed financial systems help identify promising firms, monitor borrowers, spread risk, and fund innovation. When capital reaches the most productive users, economic growth accelerates.

The United States, unlike France, England and Germany that relied on powerful central banks and crony capital allocation, became exceptionally good at this process. What were some of its features?

1. It was unusually decentralized

For much of American history, the United States had thousands of independent banks rather than a few large national banks.

Unlike Britain, France, or Germany, banking developed through a highly federalized system where states often regulated banks separately. This created intense competition but also fragmentation. Economic historians argue that the structure of American banking reflected political choices that distributed financial power broadly rather than concentrating it in a handful of institutions.

2. It combined banks with exceptionally deep capital markets

One of the most distinctive features of the U.S. system was that firms could obtain financing from both:

banks,
bond markets,
stock markets,
venture investors,
private equity investors.

Research shows that financial development promotes growth because it lowers the cost of external financing and allows firms with productive opportunities to obtain capital more easily.

American entrepreneurs were often able to raise money even when they lacked family wealth.

3. It evolved toward greater interstate integration

For much of the twentieth century, many states restricted branch banking. When those restrictions were gradually removed, banks became better at allocating capital across regions.

A peer-reviewed study found that states experienced faster growth in income and output after branch banking deregulation. Importantly, the improvement came primarily from better lending decisions, not simply more lending.

This finding is critical because it suggests that economic growth came from directing capital toward more productive businesses.

Did banking alone contribute to the US becoming an economic superpower? No.

But we became who we are partly because our financial system became exceptionally effective at allocating capital to productive and innovative uses. Growth was driven less by the sheer quantity of lending and more by the financial system's ability to identify, fund, and monitor high-return investments. A system that requires a local decision maker to finance a Montana ranch, a nearby entrepreneur, or allow a local company to scale.

Our banking system is remarkably close to Alexander Hamilton's original vision: a financial system that could mobilize savings, create credit, and direct capital toward national economic development.

It has allocated capital effectively during our 250-year existence. It's worth perpetuating.

~ Jeff

Saturday, July 18, 2026

3 Critical Assumptions Missing From Your Financial Institution's Strategic Plan

As your institution kicks off its strategic planning cycle, navigating the noise of a turbulent geopolitical environment requires shifting away from outdated playbooks. Anchor your vision in reality. Uncertain environments demand more than reactive adjustments. They require a pro-active, stress-tested roadmap that transforms macro-economic headwinds into a competitive advantage.

Allow this video to give you some thought provoking headwinds that can change your thinking, adjust your strategy, and create a financial institution built to last.

Reach out to me so we can collaborate on translating these insights int action tailored specifically to your institution's unique history, culture, markets, and direction.

Email: jeffrey.marsico@wolfandco.com

Tuesday, June 30, 2026

Guest Post:Financial Markets and Economic Update For Second Quarter 2Q26

I start my newsletter on a sad note this quarter. On June 22^nd, former Federal Reserve Chairman, Alan Greenspan, died at the age of 100. He served as Fed Chairman from August, 1987 until his term expired at the end of January, 2006. He was Fed Chairman during my formative years at Meridian Bank in Reading. He guided us through the crash of 1987, the S&L crisis of the 1980s and early 1990s, the CRE crisis of 1990, the tech stock bubble of 2000-2001, September 11^th and subsequent recession, and left his position before the housing crisis grew into the Great Recession of 2008. I’m still mad at him for raising interest rates so much in 1994. On the positive side, he guided us to ten consecutive years of GDP growth from 1991 to 2001. I, like most investors and banking industry professionals, had a love-hate relationship with him. But to many of us, he will always be the Maestro.

Iran

The Iran conflict (or is it a war?) dominated the headlines and caused turmoil in markets- stocks, bonds, crypto, and commodities- during the 2Q26. WTI crude prices peaked at $111.50 per barrel in early April, but right before the conflict began at the end of February, crude was at $68; the increase was +64%. WTI crude is now back down to $70 today. Gas prices spiked from just below $3.00 per gallon to $4.56 on May 21^st, and have fallen back to $3.88 today, for a much slower pace of decline. Price increases likely would have been much worse had the US not had such high oil capacity. Earlier episodes of oil price spikes in 1974, 1979, 1991, and 2022 were longer lived and quickly changed from inflation risk to recession risk.

The primary issue is the danger to shipping in the Strait of Hormuz as Iran fired upon and threatened ships there. The US set up a blockade so that Iranian oil could not leave the country, pressuring their economy. While the US does not face oil and gas shortages, many countries do. Europe imports 95% of its oil, China 75%, and Japan 99%.

The US is trying to negotiate with Iran and has a fragile 60-day ceasefire, but can we trust this global threat? They use short- and long-range ballistic missiles and drones to threaten their region and the world. They threaten ships in the Strait, support terrorists like Hezbollah and Hamas, continue to seek nuclear weapons, and kill thousands of their own people as they did earlier this year. Can we even trust them to not build a nuclear weapon? I think not. Stock markets don’t trust them either, judging from recent volatility.

Change Has Come to the Fed- Finally

Kevin Warsh was sworn in as new Federal Reserve Chairman on May 22^nd at the White House (as Greenspan had been in 1987) and a new era began. Warsh served on the Fed’s Board of Governors previously, from February, 2006 to March, 2011. Like Greenspan, he believes productivity should be a major factor in monetary policy decisions and that the Fed should not just rely on published data and rules of thumb like the Phillips curve. Artificial Intelligence right now is expected to lead to another productivity boom, just as the personal computer and the Internet did in the 1990s. It was no surprise that there was no change in rates at Warsh’s first meeting while he contemplates what to change at the Fed.

Jerome Powell’s term as Chairman expired in May but, like company that doesn’t know when to leave a party, he insisted on staying on the Board of Governors. It is a highly unusual move and last occurred in 1948, when Fed Chairman, Marriner Eccles, refused to leave the Board when his chairmanship ended despite a request by President Truman to step down. Why do we give separate Chair and Board terms to these obnoxious people? On May 31^st, Powell received the Profiles in Courage award from the JFK Presidential Library. For what exactly?

Chairman Warsh is setting up five working groups to review monetary policy and operations, how to communicate to markets and to the public, data sources and potential new ones, productivity and job growth, and inflation measures and targets. Hopefully he dumps the SEP, or Summary of Economic Projections, because it is often ridiculous, senseless, and more inaccurate than accurate. (For this quarter, Warsh did not provide any projections; the other 18 FOMC members did). Does it bother anyone that they project inflation to fall but it always takes two years to get to target? Does it bother anyone that they project low GDP growth, but don’t project lower rates?

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- Could we be seeing the bottoming and reversal of the nearly four-year negative cycle in the LEI? May’s index was +.1%, following April’s rise of +.3%. March was down -.6% likely due to the shock of the Iran conflict, and February rose +.3%. The index had declined in 39 of the last 47 months. We’ve seen three increases- all this year and five months of no change in 2024 to 2026. LEI had signaled recession many times in those 39 months, but like the inverted yield curves of 2022 to 2024, a sustained downturn in GDP never occurred.

Inflation- The Iran conflict led to a spike in oil prices from $68 to $111.50 in April and we have seen prices fall back in May and June when hopes of an end to the conflict are at their highest. However, headline and core (ex. food and energy) prices that were trending down toward targets are now uncomfortably high. CPI for May y-o-y was +4.2% and core was +2.9%. PCE in May was +4.1% and core was +3.4%. PPI for May was +6.5% and core was +4.9%. It feels like 2022-2023 all over again, but the measures are all expected to decline as oil prices and the slower moving gas prices drop back down to pre-conflict levels. We are still in the unnatural and unprecedented situation where PCE is too close to or greater than CPI; May PCE of +4.1% is just .1% under CPI of +4.2%. May core PCE of +3.4% is .50% greater than May core CPI of +2.9%. CPI is supposed to be .50% higher than PCE in a normal relationship. I’m currently reviewing the “Truflation” measure, which is a real-time y-o-y estimate for CPI, started in December, 2021. For you Bloomberg users, the ticker is TRUFUS44.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.5% for 2Q26. GDP had improved in 1Q26 to +2.1%, following +.5% in 4Q25. Nominal GDP was +5.1% in 1Q26, falling from +5.8% in 4Q25.

Moody’s Beige Book Index- The June, 2026 Beige Book showed a lot of improvement. Ten districts increased, one was flat, and one declined, which sadly was our own Philadelphia district. The Moody’s index improved to 36.1 in June, following 25.0 in April, and 16.7 in March.

M2 Money Supply- M2 y-o-y growth was unexpectedly stronger in May at +5.6%, following April +4.7%, March +4.3%, and February +4.3%. Finally, May’s growth is close to the average nominal GDP growth of +5.5% for 1Q26 and 4Q25. We saw outright declines from December, 2022 to March, 2024 that were hurtful to growth. The velocity of money has been flat at 1.41 in 1Q26, 4Q25, and 3Q25. (Remember GDP=M x V).

Spacex and the Markets

Spacex completed the largest IPO in history on June 12^th, priced at $135 per share. Trading opened at $152.75, hit a trading high of $225 within days, and slowly faded back to $153 on June 26^th. Elon Musk became the first trillionaire with that issuance. The market cap stands at $2.0 trillion.

Spacex isn’t the only stock to rise and then fall back this quarter. After stocks fell in March and April, prices rallied in May into June, before turning down as we see volatility with Iran and quarter-end repositioning. The S&P 500 forward PE ratio is about 23 (19 to 24 is typical in a bull market). AI investment and buildout will take an estimated three to five years and should lead to increased productivity, increased corporate profits, and increased GDP growth, albeit with potential increased job losses. With the pool of available workers growing steadily and now at 14,063,000, this could spell bad news for the labor market. Inflation will likely decline in this scenario. (Warsh knows).

Don’t forget bonds. They’ve been very volatile with a tendency toward rising rates most of the quarter. During 2Q26, the 2-year Treasury yield rose 30 basis points to 4.09%, the 5-year Treasury rose 20 basis points to 4.13%, and the 10-year Treasury rose 5 basis points to 4.37% (after peaking at 4.50% with worries about the budget deficit, US debt/GDP at 122.8%, and uncertainty over term premiums). Mortgage rates remain stubbornly high. Watch out. The curve is flattening.

World Cup

Soccer fans have taken the US by storm, with an estimated 1 million to 5 million fans visiting the US, Canada, and Mexico for the matches. Among the favorites are USA with Pulisic, France with MBappe (my personal favorite), Argentina with Messi (the greatest), England with Kane, and Norway with Haaland. My niece got to go to the Ghana match in Philadelphia yesterday to cheer on her home country. It has been exciting to watch some of the matches, but the 0-0 ties are a little trying. It’s truly exciting as foreign visitors are praising the great time they are having in America.

Large Hadron Collider

CERN has scheduled another long shutdown (LS3) for the LHC starting tomorrow to increase its capacity; this shutdown will last until June, 2030. Other shutdowns included the September, 2008 one right after the LHC was started up on September 10, 2008, due to electrical issues and helium leaks and coincided with the Great Recession. A temporary shutdown occurred in November, 2009 when a bird dropped a baguette into the electrical substation. LS1 was from February, 2013 for two years, and LS2 was from December, 2018 for over three years, coinciding with the covid-19 pandemic. We will wait for what’s next. In all these years, I only remember one important discovery, that of the Higgs Boson particle in 2012. Perhaps they don’t tell us everything. Why would they keep spending extreme amount of money on the LHC? Maybe they will someday tell us.

Italy- Here We Come!!

This summer, we will visit Milan, Lake Como, Florence, Pisa, Tuscany towns of Chianti and San Gimignano, Cinque Terre, and Rome. We are just praying that the 100+ degree heat wave ends before we go. We have an excellent Italian travel agent who took care of all details- large and small. I highly recommend her and if you plan a trip to Italia, let me know and I’ll give you contact information.

The Italian economy is producing just +.5% GDP growth despite its strength in manufacturing. Unemployment is 5.7%. Government debt is putting a drag on growth, with the debt/GDP ratio of 133.3%; US growth is also slowed by its ratio of 122.8%. Prime Minister, Giorgia Meloni, has her hands full trying to improve the economy while navigating the EU rules.

So, for now, arrivederci!

Thanks for reading! As always, I appreciate your support! Viva l’Italia! DLJ 06/28/26

Saturday, June 27, 2026

What Drives Bank Valuations?

I've been researching what is driving bank stock valuations. It has been a subject that has lived rent free in my head for years. What I would like to drive valuation: long-term EPS growth, financial performance and financial condition. There is correlating factors to these drivers. But I also can't ignore how much tangible book value per share (TBVPS) growth is also a key driver.

Banking is one of the only industries that anchor valuations so heavily to equity. Not just my opinion. A CEO just lamented about this. What makes it troublesome is that retail bank stock investors like a clean balance sheet, good profits, and a strong dividend. Pay a higher dividend and you stunt TBVPS growth. And since this is a valuation driver, you might be slowing share price appreciation.

You can see this play out with banks that have poor earnings. They trade at relatively high P/EPS multiples versus very profitable banks. It is common to see a very profitable bank trade at less than 10x P/ EPS while a terrible earner trading at 15x-20x. The poor earner might be trading at book, while the good earner at 1.25x book. Telling you all that you need to know about the peculiarities of bank stock valuation.

To do a deeper dive, I ran a lot of data. I downloaded the following data points for years 2021 - 2026Q1:

TBVPS Growth, EPS Growth, Leverage Ratio, NPAs/Assets, ROAA, ROAE, Net Interest Margin, Cost of Funds, Yield on Earning Assets, Efficiency Ratio, P/EPS, P/TBVPS

I asked Copilot to find correlations between the financial performance and financial condition factors and compare it to investment banks and consulting firms' observations on bank stock valuations. Here are the most salient findings with accompanying tables and charts.

Interesting that Copilot made no correlation to Cost of Funds, even though those publicly traded bank with the lowest cost of funds traded at the highest P/TBVPS, and second highest P/EPS (see table below). Low COF banks trading at higher multiples than higher Yield on Earning Assets banks has been consistent over the 20 years I have made the comparison.

Here is what Copilot had to say after consuming all of the data and referencing industry experts.

✅ A. ROE / ROTCE ↔ P/TBV (strongest positive correlation)

Conclusion:
👉 This is the #1 driver of bank valuation multiples

Banks with higher ROE consistently show higher TBV growth and would command higher P/TBV

Supporting evidence:

Price-to-book rises with expected ROE and capital strength [bis.org]
Bank analysts explicitly link P/TBV to ROE vs cost of equity [breakingin...street.com]

The dataset implication:

ROAE + EPS growth columns will show highest explanatory power for valuation dispersion

✅ B. ROA ↔ Multiples (very strong, often underappreciated)

Conclusion:
👉 ROA drives quality of earnings, and therefore valuation durability

Clean ROA → high NIM, low NPAs, strong efficiency
High ROA banks don’t rely on leverage → more sustainable

Observed pattern in your data:

Banks with:
- ROAA > ~1.2%
- Low NPAs
- Efficiency <55%

→ also show:

Strong EPS growth
Strong TBVPS compounding

Industry confirmation:

ROA reflects true operating performance and asset quality [linkedin.com]
Markets reward “clean ROE built on ROA,” not leverage-driven returns [linkedin.com]

✅ C. EPS Growth ↔ P/E (very strong)

Conclusion:
👉 Growth is the primary driver of P/E dispersion

From your dataset:

EPS growth volatility is very high across banks
High-growth names (especially >15–20%) stand out sharply

Relationship:

Higher forward EPS growth → higher justified P/E

Analyst view:

Bank valuation embeds expected earnings growth + cost of equity [breakingin...street.com]

✅ D. TBVPS Growth ↔ P/TBV (structural correlation)

Conclusion: 👉 TBV growth is the long-term anchor of returns

In the dataset:

TBVPS growth aligns tightly with:
- ROE
- retained earnings
- efficiency

Banks with steady TBV compounding:

Show stable ROE
Have better efficiency ratios

✅ E. Asset quality (NPAs) ↔ Multiples (negative correlation)

Conclusion: 👉 One of the strongest negative drivers

From the data:

NPAs vary dramatically
Higher NPAs → lower ROA → lower ROE → compressed multiples

Industry evidence:

Credit quality directly affects risk and valuation via expected losses [intrinsic-...vestor.com]

✅ F. Efficiency ratio ↔ Valuation (negative correlation)

Conclusion: 👉 Efficiency drives operating leverage and ROA

From the data:

Banks with efficiency <50–55% consistently show:
- higher ROA
- better EPS growth

Interpretation:

Markets reward cost discipline + operating leverage

✅ G. NIM ↔ ROA ↔ Multiples (moderate–strong chain)

Conclusion: 👉 NIM is an indirect but important driver

From your dataset:

Higher NIM → higher ROA → higher ROE → higher valuation

Industry context:

NIM compression in 2025 is already affecting profitability expectations [mckinsey.com]

✅ H. Leverage ↔ Multiples (non-linear / weak-to-negative)

High leverage can boost ROE
But:
- increases risk
- lowers valuation quality

The dataset:

Shows mixed relationship
Supports known reality: markets discount “leveraged ROE”

3) Synthesis: What actually explains bank multiples (ranked)

Tier 1 (dominant drivers)

ROE / ROTCE
EPS growth
TBVPS growth

Tier 2 (core operating drivers)

ROA (asset-level profitability)
Efficiency ratio
NIM

Tier 3 (risk modifiers)

Credit quality (NPAs)
Capital / leverage

4) How this aligns with recent investment-bank / industry commentary

🔹 1. Profitability (ROE) is still the anchor

Valuation gaps across banks persist largely due to ROE dispersion
Investors reward sustainable ROE above cost of equity [bis.org]

🔹 2. Growth skepticism is suppressing multiples

Despite strong 2024–2025 earnings:
- bank P/B and P/E remain structurally low
Investors are questioning long-term growth durability [mckinsey.com]

🔹 3. Markets increasingly distinguish “quality of earnings”

Banks are not valued just on ROE:
- but how ROE is generated
Clean ROA + low credit cost outperform leverage-driven models [linkedin.com]

🔹 4. Strategy + credibility now matter more

Bain: valuation dispersion driven by:
- execution consistency
- growth narrative
- capital allocation credibility [bain.com]

🔹 5. Structural valuation framework

Investment banks (FIG coverage) consistently anchor:

P/TBV ↔ ROE / ROTCE
P/E ↔ EPS growth + cyclicality
Adjusted for:
- credit risk
- capital strength [acetheround.com]

5) Bottom line (what the dataset is telling us)

🔴 The single most important takeaway:

👉 ROE (and ROTCE) is the strongest direct driver of bank trading multiples

🔵 But the true causal chain in your data is:

NIM + Efficiency + Credit quality → ROA → ROE → TBV growth → Multiples

🟢 And the market overlay is:

Growth (EPS, TBV) determines P/E vs P/TBV premium
Risk (NPAs, leverage) determines discount vs premium

Thursday, June 11, 2026

How Banks Make Money: Culture. Not Kidding.

I recently spoke at a banking conference with a session titled: Profit Drill Down-How Banks Make Money. Below is a summary of my comments.

Core Thesis

Banks improve performance when executive-level KPIs are systematically translated (“waterfalled”) down to every level of the organization—so that individual roles, units, products, and customers all align to the same economic drivers. When done well, this creates a self-reinforcing culture—an “invisible hand” guiding behavior without constant top-down pressure.

1. The Problem: Strategy Doesn’t Reach the Front Line

• Banks typically track high-level KPIs (e.g., Net Interest Margin, ROE, efficiency ratio).

• But these metrics often don’t translate meaningfully to frontline staff:

Example: What does a 3.80% NIM target actually mean to a relationship manager?

Without translation, KPIs remain abstract, disconnected, and ineffective as drivers of behavior.

2. Culture as the Missing Link

• The presentation defined culture as:

An“invisible operating system”
An alignment mechanism
A value creation engine

Strong performance isn’t just about strategy—it’s about embedding that strategy into everyday decisions.

3. The Solution: KPI Waterfalling

The key idea is to decompose bank-level financial outcomes into actionable drivers at every level:

Example Cascades

• Net Interest Margin (NIM) → Branch KPIs (deposit mix, deposit spreads (%), deposit spread growth); Lender KPIs (loan spreads (%), loan spread growth)

• Return on Equity (ROE) → Marketing KPIs (campaign ROEs); Lender KPIs (portfolio ROEs); Relationship KPIs (ROE hurdle rates)

• Efficiency Ratio / Expense Control → Support function KPIs (opex/loans serviced), opex/deposits serviced)

Result: Each employee sees how their actions directly affect enterprise outcomes.

4. Extending to Products and Customers

• The framework emphasizes profitability at the product and customer level, not just the bank level by understanding:

Which products generate the most risk-adjusted revenue
Which customers create or destroy value

Banks can allocate effort, pricing, and strategy more effectively.

5. Performance Insight: Variation Matters

• Benchmarking across banks shows wide dispersion between top- and bottom-quartile performers. Benchmarking within the bank can also be powerful, i.e. which Lender demonstrated the best improvement in loan spreads among our team of lenders?

• Trend compares apples-to-apples: how did the Market Street branch deposit spread improve over time?

This highlights:

o Execution—not just strategy—is what differentiates performance

o Proper alignment and accountability can close that gap

6. Cultural Impact: Turning KPIs into Behavior

When KPI waterfalling is done correctly:

• Everyone shares the same goals, not just executives

• Employees feel:

Connected to the strategy
Supported rather than policed

• Decision-making becomes:

Faster. There is greater empowerment, less policing
More consistent
Economically aligned

7. Key Takeaways

• Tie strategy → KPIs → compensation → daily activities across all levels

• Make KPIs relevant and actionable for each role

• Use alignment to create a performance-driven culture without constant oversight

• Culture becomes the“invisible hand” that drives sustained improvement

Bottom Line

The presentation argued that financial performance is not just a function of strategy—it’s a function of alignment.

When banks successfully cascade KPIs from the boardroom to the frontline and down to individual customer decisions, those KPIs stop being metrics and instead become shared goals that shape behavior, ultimately driving superior, consistent performance.

~ Jeff

If you find granular measurements like what was mentioned here as elusive or you lack the resources to do it, please contact me at jeffrey.marsico@wolfandco.com.