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Morgan Stanley CEO: 'I'm bullish on the bank stocks'

  • Financial stocks have struggled so far this year.
  • Morgan Stanley Chairman and CEO James Gorman expects bank stocks to benefit from higher interest rates and less regulation.
  • Gorman said Thursday's broader market decline could be the beginning of a more volatile period.

The head of one of the largest U.S. financial firms said he sees a solid case for a rally in bank stocks ahead.

"If we get a more normal yield curve, I'm bullish on the bank stocks. I'm not surprised the market is reacting the way it is," Morgan Stanley Chairman and CEO James Gorman said Thursday on CNBC's "Closing Bell." The yield curve refers to the relationship between short-term and long-term interest rates. Bank profit increases when long-term rates rise, making the curve steeper.

Gorman pointed to better capitalization, strong liquidity and other conditions "primed for growth." The banks should also benefit from the Federal Reserve's and other central banks' plans to tighten monetary policy and the Trump administration's deregulation proposals.

The Fed on Wednesday did not object to any of the capital return plans of 34 banks it reviewed, the first time in the seven-year history of the annual stress test implemented following the financial crisis.

Financial stocks are the fourth-worst performer in the S&P 500 this year. However, on Thursday after the stress test's second-stage results were released, bank stocks climbed while the broader market fell.

The S&P 500 closed nearly 0.9 percent lower and dipped below its 50-day moving average in intraday trade for the first time since May 18. The CBOE Volatility Index (.VIX), considered the best gauge of fear in the market, leaped to a high of 15.16, also its highest since May 18.

"So we're now coming into this period of real volatility. People are starting to take positions, and we're seeing that action in the market," Gorman said.

"We've had an incredibly flat yield curve, and I think this is perhaps the beginning of more normalization," he said.

Treasury yields climbed this week with a rise in European bond yields following European Central Bank President Mario Draghi's comments that "reflationary forces are at play." The U.S. 2-year Treasury yield on Tuesday hit a high of 1.38 percent, its highest since March 15. The U.S. 10-year Treasury yield climbed Thursday to 2.297 percent, its highest since May 24.

On Wednesday, Morgan Stanley said the Fed approved the firm's plan to raise its quarterly dividend to 25 cents a share, up from 20 cents a share. The dividend increase is set to be declared for the third quarter of 2017.

The bank also said it will increase share repurchases from $3.5 billion to up to $5 billion of outstanding common stock for the four quarters beginning the third calendar quarter of this year.

The stock closed 0.97 percent higher Thursday, up 5.9 percent year to date.