Investment banks are putting out almost record earnings, and investors should buy into the sector soon, said Jon Peace, European banks analyst at Nomura. (See his stock recommendations, below).
"We think the worst is very much behind for the investment banks," he said.
"We can see that there are probably still losses to be recognized on some toxic asset classes, but what we’d argue is that given the fallen prices we've seen to date, the worst for the subprime asset classes is very much behind," he said.
The steepness of the yield curve will likely allow banks to continue posting earnings that would have been unthinkable just a few months ago, Peace said. But investors should move quickly, as a loss in market predictability could damage the sector's strength.
"It's been a dream scenario. We know investment banking revenues will be unsustainable from the record level...so profits will come down — but we think this is two, three, four quarters away."
Despite an improved investment banking sector, Peace warned investors to stay leery of commercial banks.
"We’re really at the very early stages of what we’re thinking of as the second crisis, the commercial banking crisis," he said. "The losses the banks face on their ordinary lending going forward from here is going to be a multiple of what they may still face in terms of subprime asset writedowns."
A look at other financial stocks:
Peace does not own shares of any of the recommended stocks.