Recession-Ready Bank Stocks Can Rally 50% Next Year, Wells Fargo’s Mayo Says

(Bloomberg) — It’s about to be “showtime” for US banks stocks, with the group likely to surge by 50% next year even as the economy falls into recession, says veteran banking analyst Mike Mayo.

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A mild recession, the Wells Fargo & Co. analyst’s base-case scenario, could give banks their best year in nearly three decades as higher interest rates will bolster profits. What’s more, lenders face lower credit risks in the wake of reforms introduced following the 2008 financial crisis.

“Banks should perform better in an upcoming recession than for any other in modern history,” Mayo, who has spent more than 30 years tracking banks, wrote in a note to clients. “Banks have prepared for this moment for over a decade.”

Mayo’s top picks to capitalize on his bullish call include Bank of America Corp., US Bancorp and PNC Financial Services Group Inc. All three stocks have fallen at least 24% this year. He adds that Citigroup Inc. could also perform well “if geopolitical tensions ease.”

The outlook from Wells Fargo’s head of US large-cap bank research implies a jump that is more than double the current consensus expectation of about a 24% increase for the KBW Bank Index over the next 12 months, according to data compiled by Bloomberg.

The banking gauge, which is made up of some of the largest American lenders, has plunged 26% this year, leaving it on pace for its worst annual performance since 2008. The only time it has seen a jump of 50% or more during a year was in 1995 when it soared by a record 55%.

Wells Fargo’s largely bullish views on banks may also provide some cheer for value-investing fans amid speculation that the Federal Reserve will ease the pace of rate hikes next year, which has sparked debate over whether growth stocks will be back in favor. Mayo says bank earnings will grow at twice the pace of the broader market while trading at a third of their historical price-to-earnings ratio.

Bank-stock investors might be looking at one of their best opportunities, “given the contrast between good bank fundamentals and cheap valuations versus the S&P 500,” Mayo said separately by phone.

–With assistance from Mark Tannenbaum and Felice Maranz.

(Updates to reflect Thursday trading.)