Regional Bank Short Report
11/26/25
SEQH CAPITAL RESEARCH
Regional Banks – 2026 Bearish Thesis
Tear Sheet | November 2025
Core View
Regional banks face sustained earnings and capital pressure into 2026 from margin compression, rising credit costs, and secular deposit competition.
Sector discounts vs. the S&P 500 look justified and likely insufficient; short bias favored via indices and selected single names.
Key Drivers
Net interest margin (NIM) pressure
Deposit costs remain sticky as nonbanks and money funds bid aggressively for cash; deposit betas elevated vs. prior easing cycles.
Loan yields reprice down as competition intensifies and demand normalizes, compressing spreads by an estimated 50–100 bps into 2026.
Credit cycle deterioration
Fraud-linked losses at select regionals highlight control weaknesses and late-cycle underwriting slippage.
Rising delinquencies in auto, credit cards, and weaker CRE segments point to higher 2026 charge-offs and provisioning.
Funding and franchise stress
Structural share loss of deposits to money market funds, fintechs, and digital platforms erodes the low-cost funding base.
Stablecoins and “cash-like” alternatives begin to undermine the traditional deposit franchise, especially with younger and rate-sensitive customers.
Valuation & Return Setup
Sector (KRE/KBWR/KRX) around low‑teens forward P/E and ~1.2x P/B still embeds optimistic assumptions for NIM, credit, and deposit stability.
Base case:
NIM down ~40–60 bps; NII −8–10%; credit losses elevated vs. pre‑COVID norms; P/E compressing toward ~10x.
Implied 12‑month downside for sector baskets: roughly −15% to −20%.
Bear case:
Sharper CRE and consumer credit losses, higher wholesale funding reliance, one or more capital‑raise or forced‑sale situations.
Implied downside: roughly −20% to −25%+.
High‑Conviction Short Focus
Zions Bancorporation – Fraud hit, CRE and Western market exposure, reputational damage and tail‑risk on further credit issues.
Western Alliance Bancorp – Fraud‑linked exposure, CRE heavy footprint, high beta funding profile.
Comerica – Commercial / CRE and cyclical auto‑adjacent risk, spread compression, franchise under competitive pressure.
Huntington Bancorp – Auto credit and efficiency challenges; vulnerable to credit normalization and margin squeeze.
Index implementation: SPDR S&P Regional Banking ETF , Invesco KBW Regional Banking ETF , and KBW Regional Banking Index exposures capture the broader theme.
Monitoring & Catalysts
Q4 2025 and early‑2026: forward NIM guidance, deposit cost commentary, and loan loss provisioning trends.
Credit data: early‑stage delinquencies and CRE modifications/extend‑and‑pretend behavior as leading indicators of loss recognition.
Funding: evidence of accelerated deposit outflows or increased wholesale dependence.
Event risk: distressed M&A, capital raises, or regulatory actions at mid‑size regionals.
Attachment:
Full Regional Banking Short Report (SEQH Capital Research, November 2025)
