"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."
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," 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 has an ongoing effort under way to buy distressed Bear Stearns .
In a positive note, regulators said Monday that banks in the Federal Home Loan Bank system to expand their holdings of Fannie Mae and Freddie Mac securities.
Disclosure: Neither Cassidy nor his firm have holdings in the stocks he mentioned.
Cramer: The WORST Bank Stock