Investors too embrace banks in year’s second half

Investors who are “apathetic” or negative toward banks will change their stance in the year’s second half, according to RBC Capital Markets’ top banking analyst.

Gerard Cassidy predicts bullishness will make a comeback due to strong revenue growth and optimism surrounding credit.

“You can really see people coming back to [bank] the stocks. They’re under-owned,” the firm’s head of U.S. bank equity strategy on CNBC’s “Fast Money” on Thursday. “At these valuation levels, there’s limited downside from here. But I think as people realize the banks are just not going to have the credit issues that they had in ’08-’09, that’s going to be the real rallying point for owning these names.”

Cassidy, one of Institutional Investor’s top-rated analysts, delivered his latest forecast after the Federal Reserve revealed the results of its most recent stress tests. The results determined all 34 banks have enough capital to cover a sharp downturn.

“The results came in quite nicely,” he said. “One of the major risks that we hear from investors today is that they’re worried about credit losses going higher.”

Financials have been under pressure. With just a week left in the first half, the S&P 500 banking sector is off 17%. Cassidy suggests the group is being unjustly penalized for recession jitters.

“What this [stress] test shows us, that unlike in ’08 and ’09, when 18 out of the 20 largest banks cut or eliminated their dividends, that’s not going to happen this time,” said Cassidy. “These banks are well-capitalized. The dividends are going to be safe through the downturn.”

Cassidy speculates rising interest rates will set the stage for “amazing numbers” starting in the third quarter. He highlights Bank of America as a major beneficiary.

“We’re forecasting Bank of America could have 15% to 20% revenue growth this year in net interest income because of the rise in rates,” said Cassidy, who has a buy rating on the stock.

He expects struggling banks including Deutsche Bank and Credit Suisse to deliver better earnings results this year, too. Even in case of a financial 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 “Once people realize credit is not that bad and the revenue growth is real strong, that changes the sentiment hopefully in the latter part of the second half of this year.”

S&P financials rallied 5% last week.