RBC Analyst Is Bearish on U.S. Banking Sector

U.S. bank stocks are heading for a “dead cat bounce,” says RBC Capital Markets analyst Gerard Cassidy, giving him reason to be bearish on the bank sector even though he expects a short-term rally.

In a note to clients, Mr. Cassidy says banking  stocks could come back by as much as 20% going into second-quarter announcements, but he believes that the “fundamental trend” is still downward.

He notes that that since May 27, the price change in U.S. bank stocks have ranged from a dramatic drop of 53% - as in the case of Ohio-based Fifth Third Bancorp (FITB), which cut it's divident 66% on Thursday, and was trading under $10 on Friday  – to a modest 5% increase for tiny UMB Financial Corporation (UMBF), with $8-billion in assets in its banks in Missouri, Kansas, Colorado and Arizona. While banking stocks have declined by anywhere between 6% and 18%, depending on the index used, the Dow Jones and and S&P 500 index has declined by only 4.5% in the same period.

Mr. Cassidy says the stocks with the biggest declines are banks experiencing the most severe credit problems.

Still, he says many banking stocks are still not cheap. The top 100 banking stocks are now trading at up to 190% of their price-to-tangible book value, his preferred metric, and predicts they will eventually to fall to trade at 125% of tangible book value.

We believe bank stocks are poised for a “dead cat bounce” as we enter the second quarter earnings season in July. The old adage of ‘sell on rumor, buy on news’ will likely apply to bank stocks as the second quarter earnings announcements get under way in July.