Why KBW's McGratty says Citi will be the top Big Bank performer of 2026

Melissa Lee (Host) 00:00.070

shares of city jumping nearly three percent today hitting levels not seen in more than seventeen years our next guest says the stock will be the top big bank performer next year for more on the twenty twenty six outlook for financials KBW head of US bank research chris mcgrady

Melissa Lee (Host) 00:14.390

joins us here on set K B W is a stifel company chris great to have you with us great to

Chris McGratty (Head of US Bank Research) 00:18.910

see you so

Melissa Lee (Host) 00:19.590

why city what's the backdrop here

Chris McGratty (Head of US Bank Research) 00:21.190

well cities in the midst of a multi year turn around right they're simplifying the business they're exiting countries and they're taking the roe from bottom tier to average and you can make a lot of money going from bottom tier to average so the stock 's been a great stock this

Chris McGratty (Head of US Bank Research) 00:37.710

year but if you look at the valuation it's just breaking through tangible book right the last ten fifteen years that's been the ceiling we think the narrative on deregulation and capital markets helps bring that ceiling higher in

Melissa Lee (Host) 00:49.830

terms of the deregulation narrative i mean that has been you know some of the fuel for this bank trade for this entire year how far are we in terms of realizing those gains it's

Chris McGratty (Head of US Bank Research) 01:00.230

it's less of an unknown you know people expect it if you look at expectations expectations for capital return broadly are up about thirty percent this time versus a year ago but if you think about it there's still a hundred to two hundred basis points of excess capital that is

Chris McGratty (Head of US Bank Research) 01:15.030

yet to be put in our projections into buy side sell side models so there's still the the use of capital debate right we're talking about buybacks we're talking about dividends we're talking about inorganic growth but earnings earnings have a real big impact on the trajectory of

Chris McGratty (Head of US Bank Research) 01:28.550

estimate revisions has a big correlation over my career to stock so earnings revisions for the largest bank up sixteen percent year on year that's two X the smaller banks so those banks are outperforming but for good

Guy Adami (Fast Money Contributor) 01:39.190

reason chris we're making the same argument for cities so let's play the math game i don't think it's deserved of a JP morgan price a tangible book but somewhere between where it is now and where JP morgan is makes sense does one eight somewhere between one point eight and two

Guy Adami (Fast Money Contributor) 01:53.830

makes sense because if that's the case this stock has another sixty five seventy percent of upside

Chris McGratty (Head of US Bank Research) 01:59.350

yeah that's not our base case that feels a little aggressive but what one two to one five you can make a lot of money right JP morgan 's trading it three times and they're delivering twenty percent returns cities target for next year is ten to eleven and i think what's really

Chris McGratty (Head of US Bank Research) 02:14.310

going to be important as you look into may they have a very important investor day on may seventh i think what they're gonna talk about there and investor days have been the top of the du jour for the banks they're gonna talk about that medium term target probably going twelve

Chris McGratty (Head of US Bank Research) 02:27.750

thirteen fourteen they're gonna give you the path over the next couple years if that happens they're gonna be compounding book value they're gonna be simplifying the business and earnings estimates are growing up so i think there's a lot of room between my number and yours so

Tim Seymour (Fast Money Contributor) 02:38.030

chris you're focused on on on city but broader now for me every time you go into the people sometimes get burned are you where are you on them for twenty twenty six

Chris McGratty (Head of US Bank Research) 02:48.430

i think selective would be the word they're making a lot of money they're building really great competitive companies through acquisitions our experience studying this for twenty years is as that is occurring as they're building more profitable companies the stocks don't

Chris McGratty (Head of US Bank Research) 03:03.510

necessarily outperform but would i be doing anything differently no i'd be i'd be deploying the capital to where the highest returns are but we are selective so one of the names we really like is citizens citizens bank again this is a pre you know pre described you know the roe

Chris McGratty (Head of US Bank Research) 03:18.310

improvement story is baked right they're going from ten to fifteen sixteen percent just basically the passage of time another reason we like it you get that capital markets exposure middle market capital markets and and then finally we don't think they're going to be acquiring

Chris McGratty (Head of US Bank Research) 03:32.350

another bank they've been very clear about there's enough organic momentum and that can continue so you can make a lot of money even without the help of M and

Steve Grasso (Director of Institutional Sales) 03:39.150

A kristen i think foreign banks you like here and again maybe you don't cover i'm just curious if there's any like geographies that you find pretty interesting

Chris McGratty (Head of US Bank Research) 03:46.310

here yeah we focus on the domestics but if you think about the universal the largest banks broadly they all have a international component right JP morgan morgan stanley goldman sachs they have international businesses and the capital markets tailwinds across the world are

Chris McGratty (Head of US Bank Research) 03:59.270

really strong B of A is more of your domestic place cities your international place so you can kind of get the international exposure through the domestic banks