MW This fund manager sees tailwinds for banks despite unexpectedly slow start to the year

By Steve Gelsi

Cheryl Pate of Angel Oak Capital Advisors remains optimistic but says more favorable conditions for banks may take longer to materialize

More mergers between banks and a pick up in capital markets activity may still be in store for banks despite a slower-than-expected start to deal-making and stubborn inflation, a fund manager tells MarketWatch.

Cheryl Pate, senior portfolio manager for Angel Oak Capital Advisors, said speculation about a more positive banking environment that fueled a rally in bank stocks late last year has not yet fully materialized in 2025.

Investment-banking activity has been softer than anticipated due to questions around the impact of trade tariffs, uncertainty in the stock market, and DOGE budget cuts, she said.

Despite these headwinds, once there's more certainty around these issues, deal-making should pick up this year.

"I still think the capital markets rebound will be strong," Pate said.

Other tailwinds for banks along with M&A activity in the sector include loan growth and wider net-interest margins.

"The fundamentals for banks are bullish this year," she said. "They have a lot of levers to pull to improve their earnings. There's higher confidence that they'll see multiple expansion."

The firm has invested in $Citigroup Inc(C-N)$. (C) and Goldman Sachs Group Inc. $(GS)$ as part of its overall bullish view on a rebound in deal-making from multiyear lows.

Part of the bullishness around banks stems from an expectation of more consolidation in the sector due partly to the stabilization of interest rates, which provides clarity for the values of assets in bank portfolios and better visibility of company valuations.

"We think M&A is coming back in a meaningful way," Pate said. "It's been quiet."

It's expected it will take federal regulators less time to review bank and other types of mergers under the Trump administration. Bank deals not only get a review by the Federal Trade Commission but also by other federal regulators.

Pate isn't expecting megadeals among the largest banks, but larger regionals may pair up and smaller banks will look to do deals to achieve scale.

The firm is also invested in $Bank of America Corp(BAC-N)$. $(BAC.SI)$, PNC Financial Services Group Inc. $(PNC)$ and M&T Bank Corp. $(MTB)$ for their likely improvements in net interest margin.

Angel Oak took long positions in UMB Financial Corp. $(UMBF)$ and SouthState Corp. $(SSB)$ as a way to express their positive view on accelerating bank M&A.

"Both have a successful history as acquirers, recently closed acquisitions and could be beneficiaries in continued mergers among regional banks as potential buyers," Pate said.

Atlanta-based Angel Oak Capital Advisors manages about $18 billion. Pate manages the firm's Financial Strategies Income Term Trust FINS, along with private funds and separately managed accounts.

Separately, Truist analyst David Smith said bank-stock investors were "excited" about prospects for an increase in loan growth, a steeper yield curve, regulatory clarity, and a wave of mergers and acquisitions both in the sector and among corporations overall.

"Two months in, none of these have played out in earnest yet," he said.

While investors we speak with are still generally positive on banks, there is more caution than a month or two ago as the bull case becomes incrementally harder for many to make near term," he said.

Both the KBW Nasdaq Bank Index BKX and the KBW Regional Banking Index XX:KRX are both down about 6% from their 2025 highs, he said.

Also read: Goldman Sachs downgraded partly on 'disappointing' start to 2025 dealmaking

-Steve Gelsi

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February 28, 2025 09:04 ET (14:04 GMT)

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