High interest rates: a "double-edged sword"! Citi breaks down the Q3 report cards of major U.S. banks: fundamental resilience and risks coexist.

Citi released a deep-dive analysis report on the third-quarter 2026 results of major U.S. banks on Thursday. The report noted that the recent weak stock price performance of major U.S. banks stems from the market grappling with the double-edged sword of interest rates staying higher for longer: high rates provide short-term support to banks' net interest income, but persistently high rates themselves suppress economic growth and bring multiple pressures to the banking sector. Citi explained that a flattening yield curve squeezes spreads, and the outlook for rate-sensitive fee income is under pressure; rising funding costs combined with macroeconomic uncertainty have cast doubt on the prosperity of capital markets businesses, with investment banking projects advancing more slowly and market trading volumes declining. Overall, Bank of America Corp's third quarter showed resilience in core businesses, but the external market environment continued to tighten, increasing uncertainty around growth and fee income. Revenue shows polarization Third-quarter Bank of America Corp industry revenue divergence was very pronounced, with net interest income and non-interest income clearly moving in opposite directions. Net interest income (NII) became the core engine of stable bank growth, benefiting from continued loan demand in the real economy and the repricing of fixed-rate assets in a high-rate environment, with interest business contributing strongly. By contrast, the non-interest income segment was highly volatile: wealth management performed strongly, with asset inflows and rising asset valuations driving several institutions' wealth management businesses to record results; however, rapid rate increases at quarter-end and rising market uncertainty significantly weighed on investment banking and FICC (fixed income, currencies, commodities) trading, with client trading activity declining and bond issuance and underwriting businesses clearly cooling. Deposits: rational and prudent strategy, no longer aggressively chasing deposits The large-scale deposit outflows seen in the first half of 2023 have faded, but deposit structure migration continues, with funds steadily shifting from non-interest-bearing deposit accounts to interest-bearing accounts, though the pace of migration has slowed. The industry's overall deposit base remained stable, with some banks achieving slight growth, and banks held onto core corporate and individual transaction and settlement accounts. Deposit beta (the proportion of Fed rate changes banks pass on to depositors) returned to rationality, with deposit pricing pressure mainly concentrated in large-denomination certificates of deposit and high-yield savings products. The operating approach of the banking industry has changed, no longer competing for liabilities by sharply raising deposit rates, but instead focusing on deepening primary bank customer relationships and relying on stickier transaction and operating accounts to build a long-term, low-cost funding base. At the same time, the market judges that the phase of large-scale deposit migration is basically over, with most remaining deposits being corporate operating funds and individual daily settlement funds, which are stickier; even if the Fed continues to raise rates, the increase in deposit costs will be far weaker than in 2023. Credit: proactive risk reduction, overall credit quality remains sound The key word for the banking industry's credit level this quarter is proactive risk management, rather than passive disposal of bad debt. Judging from provisions and loan data, the trend of "provisions exceeding charge-offs" is nearly universal. Major banks collectively added more than $1.2 billion in new provisions this quarter. Against the backdrop of broad loan expansion across the industry, although the absolute scale of provisions rose, loans expanded faster, and several banks saw slight declines in provision coverage ratios. Provision growth was mainly aimed at front-loaded risk defense for newly extended loans, rather than a clear deterioration in the asset quality of existing loan stock. Taking Wells Fargo & Company (WFC.US) as an example, loans grew 11% year over year, while the allowance for credit losses as a share of total loans fell from 1.52% to 1.38%; JPMorgan (JPM.US)'s provision increase likewise came from loan scale expansion, not deterioration in the quality of existing assets. Although overall U.S. consumer and commercial credit indicators remain healthy, with net charge-off rates and delinquency rates at low levels, almost all major banks proactively set aside more credit loss provisions. Commercial real estate, especially the office segment, remains a key risk area under monitoring, and banks are also proactively managing related exposures, with overall credit quality still showing strong resilience. By segment, commercial credit risk is mostly idiosyncratic corporate risk, with limited systemic risk; U.S. households remain the ballast of credit, consumer spending remains robust, and credit card and consumer loan asset quality has performed well, with a strong labor market and wage income supporting households' debt-servicing capacity. However, market-side signals have already changed, with high-yield bond credit spreads continuing to widen, reflecting that the market has begun to price in future credit risk. Institutional ratings and target prices Citi used a discounted residual income model to value five leading U.S. banks, assigning a "Buy" rating only to Bank of America Corp (BAC.US), with the other four institutions given "Neutral" ratings.