Banks Brace for Earnings Season: Strong Loan Growth Boosts NII Amid Regulation Shift

As the 2026 earnings season begins in earnest—marked by major reports from JPMorgan, Bank of America, Wells Fargo, and Citi starting January 13 and 14—the market is looking for confirmation that the financial sector can deliver strong earnings growth after a year of regulatory and economic stress. One of the primary growth levers is expected to be net interest income (NII), which has benefited from the high interest rate environment. Bank of America has already forecasted a 5–7% NII growth for 2026. Modestly rising loan volumes, especially in commercial lending, will also contribute, as deposit cost pressures start to ease in certain segments.

Investment banking is another expected earnings booster. Global M&A volume hit $5.1 trillion in 2025—the second highest on record—with 68 deals exceeding $10 billion. Dealflow momentum, particularly among megadeals in tech, energy, healthcare, and financial services, signals solid fee income potential. But execution and guidance will matter; banks need to show the ability to grow non-interest income, trading revenues, and IB fees amid more cautious macroeconomic narratives.

Regulatory dynamics are shifting. The deferred backlash against earlier, more stringent Basel III proposals is now being addressed by regulators under Vice Chair Michelle Bowman, who is preparing a more industry-friendly “Basel III Endgame” rule for early 2026. The proposed revisions aim to reduce the increase in capital requirements—possibly to near capital-neutral for the largest institutions—while standardizing risk weights and simplifying exposure calculations.

Risks remain nontrivial. Inflation is expected to stay above the Fed’s target of ~2% through 2027, U.S. labor and consumer data show potential cracks, and Fed officials warn that persistent inflation and strong AI-led capital investment could constrain rate cuts. Banks are also contending with onerous deposit competition, margin compression in long-term lending, and regulatory uncertainty—especially around trade policy, capital rules, and antitrust enforcement.

Strategic implications: banks that can combine scale with efficiency—gaining from regulatory relief, leveraging AI/infrastructure spending, and maintaining asset quality—are likely to outperform. Regional banks may benefit more from capital relief under revised Basel rules and M&A for scale. Tactically, market participants should focus on execution metrics: forward guidance on NII, loan growth, credit loss provisions, and noninterest revenues, especially in investment banking and trading operations.

Open questions include: how aggressively will deposit costs rise? When will Fed cuts actually commence and shift through into loan yields? How will revised Basel requirements be finalized—how much capital relief is real vs. promised? And will geopolitical or tariff risks undermine cross-border deal flow or cost inputs?