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Bank Stock Analyst: Stay Away For Now

Topics:Earnings | Nasdaq | NYSE | Stock Picks | Stock Market

Companies:US Bancorp

By Andrew Fisher | 25 Mar 2008 | 08:13 AM ET

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Back in the bad old days, a couple of weeks ago, billionaire investor Wilbur Ross rattled viewers of CNBC's "Squawk Box" with a prediction that "several depository institutions" would fail.

Despite what seems to be a surge in investor confidence -- and the Fed's move to save Bear Stearns -- regional bank analyst Gerard Cassidy of RBC Capital Markets is saying the same thing now.

"The steepening of the yield curve is going to positively affect the net interest margins over time -- that's what the Fed is doing to create increased profitability for the banks," he told CNBC. "However, initially, the credit problems are going to be so severe that it's going to offset the benefit of that steeper yield curve."

Recommedations:

Cassidy is urging investors to underweight the banks for the time being.

"For investors that do really need a regional bank, we recommend US Bancorp [USB Loading... () ]," he said. "Most importantly, they don't have the exposure to the construction and the commercial real estate lending, and they've managed their loan-loss reserves very effectively over the last couple of years."

What about consolidation?

"We anticipate that there are going to be a number of bank failures," Cassidy said. "The smart buyers are going to keep their powder dry, and they are going to be put on a list (by) the regulators, so that when the regulators need help in closing down banks that have problems due to this construction lending, that's where you're going to see the M&A activity...in the next six to 12 months."

The bank sector has been the focus of markets recently ... and not for positive reasons. The credit crunch has put a strain on most bank stocks. Meanwhile, JPMorgan Chase [JPM Loading... () ] has an ongoing effort under way to buy distressed Bear Stearns [BSC Loading... () ].