Regional Bank Stocks Could Continue to 'Languish' Amid Macro Headwinds, BofA Says

01:16 PM EDT, 10/08/2026 (MT Newswires) -- The setup for US regional banks is tougher than it appears heading into the next earnings season, with stocks likely to continue to "languish" amid macroeconomic challenges, BofA Securities said in a note e-mailed Thursday. Concerns about rapidly rising interest rates, volatile oil prices, and the strength of the artificial intelligence boom have dominated financial markets, BofA analysts Ebrahim Poonawala and Brandon Berman said in a note to clients. Ahead of the third-quarter reporting season, the brokerage revised its earnings per share estimates for large-cap regional banks higher by a median of 1%, while lowering projections for the mid-cap group by 0.3%. Still, BofA said its third-quarter and 2027 EPS estimates are "relatively unchanged" as it sees higher interest rates supporting margin expansion despite the pressure on capital. "While the setup in bank stocks looks deceptively attractive heading into (third-quarter) prints due to the de-rating over the last two months, we caution that stocks may continue to languish given the macro headwinds," Poonawala and Berman wrote. BofA's third-quarter outlook implies average year-over-year EPS growth of 7.6%, compared with a 15% rise in the previous quarter, according to the note. "Investor conversations over the past few weeks have migrated from focusing on (net interest income/net interest margin) durability to handicapping the risk to a moderation in share buybacks and credit fears," the analysts said. "Stable rates could allow investors to look past tempered buybacks, especially given the NII resiliency due to yield curve shift -- particularly in the belly of the curve." Regional banks are at the same time shifting budgets toward addressing cyber risks stemming from AI proliferation, according to Poonawala and Berman. "While most investors don't see an immediate risk to bank deposits due to agentic AI, there is increased focus on the downside risks given the speed at which AI technology is evolving," the analysts wrote. Unemployment, which BofA said is "the most important driver" of credit performance, continues to be stable. However, recent data indicate "a weaker job market than the headline implies," the analysts wrote. "Pockets of loan growth, particularly middle-market and (commercial real estate), could be challenged by higher rates and energy costs." The brokerage lowered third-quarter EPS projections for four banks in the large-cap category, including Huntington Bancshares (HBAN), and for a dozen mid-cap lenders, led by Flagstar Bank (FLG). Within the large-cap group, the brokerage also trimmed the EPS forecasts for Citizens Financial Group (CFG), PNC Financial Services (PNC), and Truist Financial (TFC). It raised the projections for Fifth Third Bancorp (FITB), KeyCorp (KEY), M&T Bank (MTB), Pinnacle Financial Partners (PNFP), Regions Financial (RF), and US Bancorp (USB). The brokerage said it continues to favor Citizens Financial, Fifth Third Bancorp, US Bancorp, Popular (BPOP), Cullen/Frost Bankers (CFR), East West Bancorp (EWBC), and Pinnacle Financial, "where valuations offer an attractive risk/reward" despite heightened macro uncertainty. "We believe increased visibility on the path of interest rates will be imperative in order for investors to regain confidence in the economic cycle, and for bank stocks to re-rate," Poonawala and Berman said. Price: 15.21, Change: +0.04, Percent Change: +0.23