Large Cap Banks — Analyzing Implications of Higher Rates: Positive for NII, Some Hit to Capital; Key Is Impact on Economy

A key concern impacting bank stocks has been the implications of higher rates, as the market now expects 4 more hikes through YE27. We expect two key implications near term: 1) higher rates should be positive for the majority of our banks and the net interest income outlook should be positive; 2) little hit to capital ratios from higher long-term rates. 1-2 rate hikes should have small benefit and a larger number of hikes greater benefit, more so for larger banks, driven by the lag in deposit pricing, mostly on consumer deposits (about 58% of deposits). Swaps would offset some of the benefit for some banks, with Truist most exposed. Higher long-term rates should boost fixed asset repricing but be a headwind to capital ratios, estimated to hurt large traditional banks' CET1 by about 10-20bp and more at trust banks. The yield curve has steepened in 3Q and YTD 2026, but could flatten if the Fed hikes as expected, pressuring NIM. The key long-term concern with higher rates is the impact on