Bank stocks are divorced from bank fundamentals

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Bank stocks are trading at their cheapest levels relative to the broader market in a decade, but a confluence of catalysts, including rebounding M&A activity, deregulation and rate cuts by the Federal Reserve could offer support for the sector, according to Mendon Capital's Anton Schutz Sr. and Anton Schutz Jr.

In the episode, recorded on Nov. 26, the father-son investment team discuss the current state of bank stocks and what lies ahead for the sector. The Mendon team shared the frustration of many bank-focused investors — strong fundamental performance has not translated to higher stock prices.

In the third quarter, the banking industry's earnings grew more than 21% year over year and credit quality largely remained benign. However, bank stocks have continued to lag the broader market. The S&P 500 Index has jumped more than 16% in 2025, while the regional bank index has risen just 3.5% this year. Over the last three years, S&P 500 Index has increase more than 70%, while the regional bank index has only climbed 6%.

"What I focus on a lot right now and the kind of disconnect between the S&P 500 [price/earnings] multiples versus the [bank index]. I think we're sitting at about a 10-year relative low on P/E," Schutz Jr. said, noting that the banking sector's multiple stood at roughly 46% of the earnings multiple of the S&P 500. Comparatively, he said bank stocks traded at the same multiple as the broader market in 2016.

"Considering all the tailwinds, M&A, deregulation and just a cheap multiple, it feels like it shouldn't be there," he said.

Many investors focused on the banking sector share that view. Mendon Capital President Anton Schutz Sr. said the specialist investors dedicated to the bank space do not manage as much money as they did a decade ago, reducing their ability to influence valuations even if they think they are currently cheap. He noted that many banks have ample capital though and advocated that institutions use their dry powder to buy back stock.

"If you can buy your stock at or below book, absolutely. If you can buy it at single-digit multiples, hell, yes, I mean, it's incredibly accretive to earnings," Schutz Sr. said.

Bank valuations seem to have been negatively impacted by fears in the general investor community over a potential turn in the credit cycle. While a handful of regional banks reported issues related to loans to nondepository financial institutions in the third quarter, most regional and community banks, in a variety of geographies, reported strong credit quality in the period.

The Mendon investors downplayed recent concerns over losses related to NDFI loans and expressed confidence in the sector's credit quality, noting that regulated banks have more conservative lending practices than loans being made in the private credit markets. They believe valuations are cheap but also see several potential catalysts for stronger bank stock performance, including renewed M&A activity, regulatory changes favoring deregulation and the potential for interest rate normalization to benefit lending margins.

"I do think that the consolidation cycle is going to really turn some heads," Anton Schutz Sr. said. "And it's the first time it's really picked up steam in terms of the M&A cycle in quite some time."