Investors who are “apathetic” or negative about banks will change their attitudes in the second half of the year, according to RBC Capital Markets’ top banking analyst.
Gerard Cassidy predicts bullishness will make a comeback due to strong revenue growth and optimism around credit.
“You can really see people coming back to [bank] the shares. They are underexposed, “the firm’s head of US banking strategy on CNBC’s” Fast Money “on Thursday.” At these valuation levels, there is a limited downside from here. But I think when people realize that the banks are not going to have the credit problems that they had in ’08 -’09, then that will be the real focal point for owning these names. “
Cassidy, one of Institutional Investors’ top-ranked analysts, delivered his latest forecast after the Federal Reserve revealed the results of its latest stress tests. The results showed that all 34 banks have enough capital to cover a sharp decline.
“The results came pretty well,” he said. “One of the biggest risks we hear from investors today is that they are worried that credit losses will increase.”
The economy has been under pressure. With only one week left of the first half of the year, the S&P 500 banking sector has been reduced by 17%. Cassidy suggests that the group is being unfairly punished for the recession.
“What is this [stress] Test shows us that unlike in ’08 and ’09, when 18 of the 20 largest banks cut or eliminated dividends, it will not happen this time, “Cassidy said.” These banks are well capitalized. The dividend will be safe through the downturn. “
Cassidy speculates that rising interest rates will lay the groundwork for “fantastic numbers” starting in the third quarter. He highlights the Bank of America as a major recipient.
“We estimate that Bank of America may have 15% to 20% revenue growth this year in net interest income due to the rise in interest rates,” said Cassidy, who has a buy rating on the stock.
He expects struggling banks, including Deutsche Bank and Credit Suisse, to deliver better results this year as well. Even in the event of an economic shock, Cassidy believes they should be able to withstand it and come out with healthy capital.
“The real risk is outside the banking system,” Cassidy said, “when people realize that credit is not so bad and revenue growth is very strong, it will hopefully change sentiment in the latter part of the second half of this year.”
S&P finance rose 5% last week.
– CNBCs Natalie Zhang contributed to this report.
Disclosures: RBC Capital Markets has received compensation for investment and non-investment banking services from Bank of America for the past 12 months. It has also managed or co-managed a public offering of securities for Bank of America.