RBC’s top analyst sees his return

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Investors who are “apathetic” or negative towards banks will change their minds in the second half of the year, according to the senior banking analyst at RBC Capital Markets.

Gerard Cassidy predicts the uptrend will return due to strong earnings growth and credit optimism.

“You can really see people coming back to [bank] stocks. They’re underowned,” the company’s head of U.S. banking equity strategy told CNBC’s “Fast Money” on Thursday. “At these valuation levels, there’s limited downside from here. But I think as people realize that banks just won’t have the credit problems they had in 2008-09, that’s going to be the real rallying point to 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 latest stress tests. The results determined that the 34 banks had enough capital to cover a sharp decline.

“The results are pretty good,” he said. “One of the biggest risks we hear from investors today is that they are worried that credit losses will increase.

Finances were under pressure. With just a week to go until the end of the first half, the S&P 500 banking sector is down 17%. Cassidy suggests the group is being unfairly penalized for recession jitters.

“What is that [stress] test shows us that unlike 2008 and 2009, when 18 of the top 20 banks cut or eliminated their dividends, that won’t happen this time around,” Cassidy said. “These banks are well capitalized. Dividends will be safe during the recession.”

“Incredible numbers”

Cassidy speculates that rising interest rates will pave the way for “incredible numbers” starting in the third quarter. He points to Bank of America as a major beneficiary.

“We expect Bank of America could have 15% to 20% revenue growth this year in net interest income due to higher rates,” said Cassidy, who has a buy rating on the title.

He expects troubled banks, including Deutsche Bank and Credit Suisse, to also perform better this year. Even in the event of a financial shock, Cassidy believes they should be able to weather it and come out with healthy capital.

“The real risk is outside the banking system,” Cassidy said. “Once people realize credit isn’t that bad and revenue growth is very strong, that changes the sentiment, hopefully in the later part of the second half of this year.”

S&P financials rebounded 5% last week.

CNBC’s Natalie Zhang contributed to this report.

Disclosures: RBC Capital Markets has received compensation for investment banking and non-Bank of America services in the past 12 months. She also managed or co-managed a public offering of securities for Bank of America.

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