Financials: 22 A-Grades Hiding Five Banking Disasters

The Split is Total

Financials is two sectors pretending to be one. On top: exchanges, payment networks, and asset managers with FCF margins above 50%. At the bottom: the five biggest banks in America, all burning cash at double-digit negative margins. The gap between CME's 62.9% and Citi's -87.0% tells you everything about what works in this sector and what doesn't.

Twenty-two A-grades sounds healthy until you realize the sector median sits at 19.5% because the winners are so dominant they pull the whole curve up. Strip out the top ten and this sector looks completely different. The question isn't whether financials are strong. It's which financials you're talking about.

What Actually Generates Cash

CME Group sits at 62.9% FCF margin with an improving trend. Exchanges have pricing power and almost zero marginal cost per transaction. Visa at 51.7% and Mastercard at 48.3% print money for the same reason: they take a cut of every transaction with no inventory, no manufacturing, no physical infrastructure beyond servers. These are toll booth businesses. The cash just flows.

Capital One at 47.5% breaks the pattern. A credit card lender shouldn't have margins that high, but they do because their direct banking model keeps costs low and their underwriting has stayed disciplined. They're improving too, which means the model is working even as rates shift.

Charles Schwab at 35.3% shows what happens when a brokerage stops fighting for pennies on trades and starts making real money on deposits. S&P Global and ICE round out the top tier. Notice the theme: these companies either charge for access to something irreplaceable or operate platforms where they control the economics.

The Banking Problem Has a Name

JPMorgan, Goldman Sachs, Citi, Morgan Stanley, and Wells Fargo all carry F grades. Their FCF margins range from -22.7% to -87.0%. Every single one is improving, which tells you how bad things were before.

Banks burn cash because their business model requires constant capital deployment. Loans tie up cash for years. Regulatory requirements force them to hold buffers. Trading desks swing wildly quarter to quarter. When rates were at zero, they couldn't make money on deposits. Now that rates are higher, deposit costs eat into margins while loan growth stays choppy.

Citi at -87.0% is the worst of the group. They're improving, but improving from terrible to less terrible doesn't earn you points. Goldman at -86.9% has the same problem: their trading business creates huge quarterly swings, and their push into consumer banking never generated the returns they needed. JPMorgan at -81.3% is the least bad of the megabanks, but that's grading on a curve. A -81.3% FCF margin means the company is burning $0.81 for every dollar of revenue it generates. That's not a business, it's a capital incinerator with a banking charter.

The fact that all five are improving suggests the worst is behind them, but none of these companies will ever generate the kind of margins the top of the sector does. Their business models don't allow it.

The Middle Tier is Where it Gets Interesting

Regional banks like Truist, US Bancorp, and PNC sit in the 19% to 28% range with A grades and mostly improving trends. They have scale without the regulatory burden of being systemically important. They make money on deposits, keep lending disciplined, and don't blow themselves up with proprietary trading.

Insurance shows up here too. Travelers, Chubb, Progressive, and MetLife all generate double-digit margins because insurance float creates cash flow even when underwriting is break-even. The model works as long as they don't write terrible policies, and these four haven't.

PayPal at 13.8% is the anomaly. A payments company should be higher, but they've spent years trying to become a super app and burning cash on features nobody asked for. Stable trend, which means they've stopped getting worse, but they're nowhere near where Visa and Mastercard operate.

What the Trend Breakdown Means

Twenty companies improving. Four stable. Five declining. That's a healthy sector on the surface, but look closer: three of the five declining trends are Visa, Coinbase, and American Express. Visa's 51.7% margin is still elite, but the direction matters. Coinbase at 22.1% and declining suggests crypto's 2024 surge didn't translate into sustained cash generation.

The improving trends at the bottom are more important than they look. When the five worst companies in a sector are all improving, it means the pain trade is over. These banks aren't going to A-grade territory, but they might stop being disasters. For a sector with $5.5x average debt-to-FCF, that's not nothing.

Where This Sector Goes Next

Financials will stay bifurcated. The exchanges and payment networks will keep printing cash because their business models are structurally superior. The megabanks will keep burning cash because their business models require it. The regional banks and insurers will sit in the middle, generating decent margins without the explosive upside of a network effect business.

The real risk is what happens when the improving trends at the bottom stall out. If JPMorgan, Goldman, and Citi can't get to positive FCF margins even with higher rates and a stable economy, what does that say about their long-term viability? They're too big to fail, but that doesn't mean they're worth owning.

Twenty-two A-grades sounds impressive until you realize half the sector is propped up by businesses that will never generate real cash. The other half is so dominant it doesn't matter. That's financials in 2026.