This has been a very good year for investors holding shares of the largest U.S. banks. But smaller regional banks have lagged behind as a group. Catherine Mealor, a managing director at Keefe, Bruyette & Woods, expects 2026 to be another good year for the industry because of accelerating loan growth, “a steeper yield curve” and an increase in merger activity.

“The regulatory shackles have been loosened” under the second Trump administration, she told MarketWatch during an interview.

To begin, let’s look at how stocks of the largest six U.S. banks (by total assets) have performed this year, with a comparison of current and average forward price/earnings valuations and price/tangible book ratios:

All returns in this article include reinvested dividends. Through Dec. 29, the S&P 500 had returned 18.9% for 2025.

The forward P/E ratios are current share prices divided by consensus earnings-per-share estimates among analysts polled by LSEG. Among the largest six U.S. banks, only Bank of America is trading at a forward P/E below its 10-year average forward P/E, according to data provided by LSEG.

The price/tangible book ratios are current share prices divided by tangible book value per share, which excludes intangible assets, such as deferred tax assets and loan-servicing rights. All six of these stocks trade above 10-year average price/TBV ratios, but Bank of America trades lowest relative to its 10-year average price/TBV valuation.

If you are a bank looking ahead at succession planning or at the technology investments to compete as you get bigger, there is this window within this administration. If you think you might want to sell within the next three or four years, you might as well go now. You can get it closed quickly.

— Catherine Mealor, managing director at Keefe, Bruyette & Woods

It has been an amazing 2025 for the Big Six U.S. banks — no exceptions. Mealor said the universal banks’ high levels of capital could more easily be deployed through dividend increases, share buybacks and loan growth under an easing regulatory regime. “Capital markets, scale and technology play into the hands of the largest banks,” she said.

Now let’s take a look at forward P/E valuations relative to the S&P 500.

In a broad industry report on Dec. 14, KBW’s equity research team wrote that the KBW Nasdaq Bank Index of 24 of the largest U.S. banks was “still inexpensive on a relative basis to historical levels of the S&P with [forward P/E ratios] at 50% vs. 69% historically,” in part because of high valuations for “[artificial-intelligence] and other technology stocks.”

But regional-bank stocks appeared to be more attractive on the same basis for the KBW Regional Banking Index of 50 midsize or smaller regional banks, “which historically traded at 81% of the S&P versus 45% currently,” according to the KBW team.

So here are two updated charts showing relative forward P/E valuations for exchange-traded funds tracking the bank indexes, since the data isn’t available for the indexes themselves.

First, here is how the forward P/E for the Invesco KBW Bank ETF relative to that of the S&P 500 has moved over the past 10 years:

Invesco KBW Bank ETF is trading at a forward price/earnings ratio, relative to the S&P 500, slightly below its 10-year average valuation." tg-width="700" tg-height="568"/>Despite a 33.8% return for its underlying index during 2025, the Invesco KBW Bank ETF is trading at a forward price/earnings ratio, relative to the S&P 500, slightly below its 10-year average valuation.

Despite a 33.8% return for its underlying index during 2025, the Invesco KBW Bank ETF is trading at a forward price/earnings ratio, relative to the S&P 500, slightly below its 10-year average valuation.

Relative to the S&P 500, the large banks’ P/E is only sightly below its 10-year average, but it is well below KBW’s longer-term average of 69%, cited above.

Now let’s look at P/E valuations for the Invesco KBW Regional Banking ETF relative to the S&P 500:

The KBW Regional Banking ETF is trading well below its 10-year average forward P/E relative to the S&P 500.

The KBW Regional Banking ETF is trading well below its 10-year average forward P/E relative to the S&P 500.

So the midsize and smaller regional banks, as a group, still appear to be bargain-priced, based on historical P/E valuations relative to the S&P 500.

Mealor made the following points about the smaller regional banks’ underperformance this year and prospects for improvement in 2026.

• “Growth has been delayed” in 2025, in part because of “tariff noise” in April.

• The yield curve is no longer inverted — that is, short-term interest rates are now well below long-term rates. “When we have a steeper curve, you might see regionals pull away from the large banks,” Mealor said.

• Investors remain hypersensitive to any bad news when it comes to banks’ loan quality, she said, citing the declines in bank-stock prices in the wake of the bankruptcies of Tricolor Holdings and First Brands. “From what we have seen, it has been very manageable,” with a low level of problem loans overall, Mealor said.

• Merger activity for regional banks is taking off because of “the health of the industry and regulatory easing,” she said. A higher level of M&A activity supports stock prices. ”It used to take a year to close an M&A deal. We are getting them approved and closed in three months now,” she said.

Continuing with the M&A theme, Mealor looked further ahead, to the rest of President Donald Trump’s second term. “If you are a bank looking ahead at succession planning or at the technology investments to compete as you get bigger, there is this window within this administration. If you think you might want to sell within the next three or four years, you might as well go now. You can get it closed quickly.”

Eight bank stocks for the improving interest-rate landscape

As the yield curve widens, banks’ net interest margins will improve. A bank’s NIM is the spread between its average yield on loans and investments and its average cost for deposits and borrowings. According to the Federal Deposit Insurance Corp., insured U.S. banks’ NIM improved to an annualized 3.27% during the first three quarters of 2025, from 3.19% during the first three quarters of 2024.

The NIM is especially important for regional banks, which don’t have large income streams from capital-markets activity, including underwriting and trading revenue, that the universal banks enjoy.

That said, Bank of America is among this list of eight bank stocks cited by the KBW team as “best positioned for asset repricing and NIM expansion.”

Here is the list sorted by the banks’ total assets: