RBC’s Cassidy prefers ‘regionals’ over big banks ahead of earnings

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Regional banks are a better pick than their bigger rivals over the next six to twelve months, says Gerard Cassidy. He’s a Senior Analyst at RBC Capital Markets.

Why are the bank stocks down in 2022?

Bank stocks tend to do well in a rising rate environment – much like the one we’ve had in 2022. Still, the First Trust Nasdaq Bank ETF is currently down more than 25% versus its year-high in mid-August.

Much of that weakness is related to “credit”, which, Cassidy says, is a temporary risk even though a recession looks nigh. On CNBC’s “Squawk Box”, he noted:

The issue on credit, we think, will be resolved over the next three to six months as people start to realise it [recession]won’t be anywhere near as bad as the Great Financial Crisis.

He also sees a more than 20% increase in net interest revenue as a big positive for the U.S. banks.  

Cassidy reveals his favourite bank stocks

Cassidy expects the looming economic decline to resemble the early 2000s and not the Great Recession.

Last month, the U.S. Federal Reserve signalled a terminal rate of 4.60% in 2023 as Invezz reported here. To play that continued increase in interest rates, he recommends investing in the regional banks.

We’d focus on regional banks – right side of the balance sheet as we call it. It’s been fifteen years since anyone has had to focus on cheap core deposits. That’s going to be advantage the regional banks have over the larger banks.

Lower exposure to leveraged/bridge loans is also why he prefers regional banks. Names Cassidy likes in particular include PNC Financial Services Group Inc (NYSE: PNC), M&T Bank Corporation, Regions Financial Corp, and KeyCorp (NYSE: KEY).

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