Falling bank multiples, elevated risks: AI, credit, and the macro
BofA Global Research highlights renewed risks to banks from private credit and AI competition, with valuations already pricing in significant headwinds. Despite regulatory tailwinds, large regional banks trade near pre-COVID P/E levels, suggesting limited upside unless macro conditions improve.
What the desk is arguing
BofA argues that private credit and AI-driven competition are re-emerging as key risks for the banking sector, weighing on valuations despite regulatory support. At the BofA Financials Conference, management teams flagged these concerns, but the desk notes that many large regionals already trade back to pre-COVID P/E levels, implying much of the bad news is priced in.
Supporting evidence includes the view that banks have defenses against AI disruption—through their existing customer relationships and potential efficiency gains—and that credit deterioration is not the base case for US economics. However, if macro conditions worsen, valuation multiples and earnings would face further pressure.
The desk implicitly rejects the idea that current valuations offer a compelling entry point without a clearer macro outlook. They see limited upside unless the macro backdrop improves, but they do not anticipate a severe downturn either.
Key takeaways
- 01Private credit and AI are renewed risk factors for banks, but many have defenses and AI could enhance efficiency.
- 02Large regional bank P/E multiples have fallen back to pre-COVID levels, suggesting valuations already reflect significant headwinds.
- 03A deteriorating macro backdrop is not the base case, but would pose additional risks to bank earnings and multiples.
Market implications
Bank valuations may remain range-bound near current levels unless macro conditions improve or the industry successfully navigates AI/private credit challenges. A negative macro surprise could trigger further multiple compression, particularly for regionals with higher loan exposure.
Risks to this view
Upside risk: banks successfully integrate AI to boost margins or a benign macro supports earnings. Downside risk: credit conditions worsen or AI disruption accelerates, pushing multiples lower.
Banks confront renewed private credit and AI-driven risks Private credit has remained a persistent concern for banks, and recent events have brought those worries back into focus. At the same time, new fears around AI-driven competition and potential credit deterioration have weighed on the group. Ebrahim Poonawala joins us to discuss how management teams addressed these issues at the recent BofA Financials Conference, the potential defenses that banks have against AI disruption, and the ways AI could enhance efficiency.
We also explore how much of this is now reflected in bank valuations, with many large regionals trading back to pre COVID P/E levels despite regulatory and cyclical tailwinds. While our US Economics team does not view a deteriorating macro backdrop as the base case, such a scenario would pose risks for valuation multiples and earnings. You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life. "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation.
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