Investors who are “apathetic” or negative towards banks will change their attitude in the second half of the year, according to top bank analyst RBC Capital Markets.
Gerard Cassidy predicts the upside will return on strong sales growth and credit optimism.
“You can really see people coming back [bank] the shares. They’re under-possessed,” the company’s head of US bank equity strategy said on CNBC’s Fast Money on Thursday. “At these valuation levels, there are limited downsides from here. But I think when people realize that the banks just aren’t going to have the credit problems they had in ’08-’09, that’s going to be the real rallying point for owning those names.”
Cassidy, one of Institutional Investor’s top analysts, provided his latest forecast after the Federal Reserve announced the results of its latest stress tests. The results showed that all 34 banks have enough capital to cover a sharp downturn.
“The results came in quite well,” he said. “One of the biggest risks we’re hearing from investors today is that they’re worried about higher loan losses.”
Financial stocks are under pressure. With just a week to go in the first half of the year, the S&P 500 banking sector remains down 17%. Cassidy suggests the group is being unfairly penalized for recession fears.
“What is that [stress] Tests tell us that unlike in 2008 and 2009, when 18 of the top 20 banks cut or eliminated their dividends altogether, that won’t happen this time,” Cassidy said. “These banks are well capitalized. Dividends are sure to come through the downturn.”
Cassidy speculates that rising interest rates will set the stage for “amazing numbers” beginning in the third quarter. He highlights Bank of America as a key beneficiary.
“We forecast that Bank of America could deliver 15% to 20% revenue growth in net interest income this year as interest rates rise,” said Cassidy, who has a buy rating on the stock.
He expects troubled banks like Deutsche Bank and Credit Suisse to deliver better earnings results this year as well. Even in the event of a financial shock, Cassidy believes they should be able to withstand it and come out with healthy capital.
“The real risk is outside of the banking system,” Cassidy said. “Once people realize that the credit isn’t that bad and the revenue growth is really strong, hopefully the sentiment will change in the second half of this year.”
S&P financials are up 5% last week.
— CNBC’s Natalie Zhang contributed to this report.
Disclosures: RBC Capital Markets has received compensation for investment and non-investment banking services from Bank of America in the past 12 months. It also managed or co-managed a public offering of securities for Bank of America.
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