Summary List Placement
It’s been a boom time for bank stocks, and Gerard Cassidy says the sound won’t fade any time soon.
Cassidy has covered the sector for more than 30 years and made a name for himself as one of the best in his field. As of early June, he was the most accurate analyst on Wall Street, according to the rating database TipRanks. The database also named him the fifth-most accurate analyst of the 2010’s.
Those rankings are based on the number and the accuracy of analysts’ price targets for the stocks they cover.
Cassidy says investors are right to be optimistic about the banking sector today because banks prepared for big losses as the COVID recession set in, but relief and rescue programs from the Federal Reserve and US government forestalled most of the losses banks typically suffer in recessions.
“There’s many tailwinds that the industry currently has going for them, initially with these loan loss reserve releases, second by the steepening of the yield curve, and then third, they also have an abundance of capital on their balance sheets,” he told Insider in an exclusive interview.
Cassidy covers the 20 largest US banks, and says many of them will announce big dividend increases and stock repurchases in the second half of the year. The combination of the economic reopening trade and improved returns means the stocks, highly cyclical in any period, will do even better than usual as the economy expands in 2021 and 2022.
“The real key to bank stock investing is to understand and recognize that banks are products of their economy,” he said. “We’ve never seen banks go in the opposite direction of the economy in terms of profitability.”
That means the biggest threat to the banks isn’t innovation by upstart fintechs, he says. It’s the Fed taking control of interest rates and flattening the yield curve, which would damage their profitability.
“If we’re talking in 12 months and the Fed orchestrates what they call YCC, which is yield curve control, and forces the long end of the curve down to let’s say 1.25% on the 10-year from where we are today, that would pose problems for the banks.”
He’s far less concerned about competition from non-banks, arguing that financial institutions have faced similar challenges throughout his entire career, and the industry was still reporting record profitability before the pandemic.
The biggest obstacle for new challengers in the industry is regulation. To take deposits and make loans, a company needs to get a banking license and follow bank rules.
“When you go from a non-regulated entity to a bank regulated entity, your multiple collapses,” he said.
While he’s bullish on the sector overall and has either “Buy” or “Hold” ratings on all 20 of the banks he covers, Cassidy says he’s most optimistic about three types of companies.
(1) Money center banks
Cassidy says the best opportunities here are in the stocks that have lagged behind their peers to date, and he sees more opportunity in US-focused banks than in global ones.
“Wells Fargo and Bank of America seem better situated to benefit from the recovery relative to where their stocks are trading today,” he said. “The vast majority of their business and revenues come from the US. … The US economy is set to grow faster than the global recovery, and therefore the US-domiciled banks should do better than the global banks.”
(2) Regional banks
“Their valuations are less than their industry peers that are considered to be some of the best managed banks like PNC or US Bancorp,” he said. “If our macro outlook proves to be correct, these three can outperform relative to the higher quality names.”
(3) The acquirers
A third way to get better-than-average growth is to buy companies that are digesting recent deals and getting ready to reap the benefits.
“We also steer investors to own the companies that are currently integrating acquisitions and that their earnings growth should be accelerated due to the cost savings that will be generated,” he said. “That would include PNC and Truist.”