US bank stocks could rally 30%: RBC

Leslie Shaffer | Writer for
30% upside for US banks in one year?
30% upside for US banks in one year?

U.S. bank stocks could rise as much as 25 to 30 percent next year as their litigation costs finally begin to ease, Gerard Cassidy, a banking analyst at RBC Capital Markets, told CNBC on Tuesday.

"There's meaningful upside left for selected names of the top 20 banks," Cassidy said.

He's calling for the gains despite the strong year-to-date recovery in bank stocks, with Bank of America climbing more than 35 percent and Goldman Sachs tacking on more than 33 percent, outperforming the S&P 500's around 26 percent rise over the period.

(Read more: US banks could face legal charges of over $100 billion: S&P)

Banks' valuations haven't really recovered yet, he said.

"When you take a look at where some of our largest banks are trading, banks such as Bank of America [and] Citigroup, they're trading at big discounts to book value and when they return to normal profitability, they should be trading at premiums to book value," he added. Bank of America is trading at a price-to-book ratio of around 0.72 times.

Cassidy expects banks' return to normality to begin soon.

(Read more: Moody's cuts ratings of three big US banks)

"After a multi-year deleveraging by the American consumer as well as businesses, we're going to see an acceleration of loan growth in 2014 and a steepening of the yield curve because of quantitative easing backing off," Cassidy said.

His top picks are Bank of America, Citigroup and JPMorgan.

"The capital market players such as Goldman Sachs and Morgan Stanley are certainly a way to play the strengthening of the U.S. economy. But we think you can also maybe get a better lift as an investor in these bigger commercial banks," he said.

Adam Jeffery | CNBC

(Read more: Bank of America verdict spotlights US focus on civil cases)

All three of his top picks have around 25-30 percent of their business in the capital markets arena, but they also benefit from an acceleration in loan growth and a steeper yield curve, which Morgan Stanley and Goldman Sachs may not get as much of a boost from, he said.

Bank of America, Cassidy's top pick, has been held back by litigation costs related to its acquisition of Countrywide and other banks, he said.

U.S. banks are facing legal charges of over $100 billion for packaging and selling risky residential mortgage-backed securities in the lead up to the 2008 financial crash, Standard & Poor's said last week. The legal wrangling over Bank of America's proposed settlement of $8.5 billion is yet to be completed; the bank this week agreed to pay Freddie Mac $404 million to settle claims for losses related to loans it sold to the quasi-governmental agency between 2000 and 2009.

(Read more: Expect good Q4 in capital market fees: BofA's Moynihan)

"These litigation costs are finally starting to come down and we anticipate over the next two or three years it'll be pretty much behind the bank," he said.

With expectations the bank may be able to earn $2.00 a share by the middle of 2015, at a price-to-earnings ratio of 10 times, it could trade around $20, Cassidy estimated. "We think it'll trade even higher as investors become confident that there will not be any more litigation costs."

The stock, which closed Monday at $15.73, is trading at a price-to-earnings ratio of around 11.78 times.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1