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Banks are in their best shape in a generation, analyst Mike Mayo says

  • Widely followed analyst Mike Mayo said the banking industry has fully rebounded and is in its best shape in a generation.
  • Mayo's favorite pick is Citigroup, a bank he once harangued but now estimates could see its share price double.

Nearly eight years to the day from when Lehman Brothers collapsed and set fire to the financial world, widely followed analyst Mike Mayo said the industry has fully rebounded.

"I don't feel as though the world understands just how strong U.S. banks are. Banks have the strongest balance sheets in a generation," Mayo, an analyst now with Wells Fargo Securities, told CNBC's "Power Lunch" program. "They have enough capital to absorb not one financial crisis but two financial crises."

That wasn't the case on March 15, 2009, when Lehman lost its ability to obtain the short-term financing critical to its operations.

After a weekend of heavy wrangling to find the buyer, the government chose to let Lehman go under rather than provide a buyout. The ensuing liquidity crisis saw a prominent money market fund fail to meet its own obligations and triggered a crisis that necessitated a massive Wall Street buyout.

Fast-forward to 2017, and conditions have changed dramatically, Mayo said.

Mike Mayo
Scott Mlyn | CNBC
Mike Mayo

"We think banks are on the cusp of creating value for the first time in a decade," he said. "This is back-to-school. Take out your pencil, sharpen it, do the math. When you do the math, you see these banks are very resilient."

While Mayo spoke glowingly of the industry, he is most focused these days on Citigroup. Mayo estimates the fourth-largest U.S. bank by assets could double in price over the next five years, with a long-term target of $140.

There's irony in that call, seeing that Mayo is well-known for haranguing Citi in the past. In 2010, he ripped the bank for what he called "aggressive" accounting and said it needed a substantial write-down in assets.

"We love Citigroup," he told CNBC.

As far as the industry is concerned, he said, "this is the biggest structural risk reduction the bank industry has had for decades. These structural changes are what's going to continue to drive banks."

Despite the optimism, the sector has fared poorly in the market this year. The SPDR S&P Bank exchange-traded fund is down about 3.3 percent for 2017, well off the S&P 500's gain of more than 11 percent.

But analysts continue to favor the sector.

Moody's Investors Service said earlier this week that it was putting Bank of America on notice for an upgrade of its credit rating. BofA currently carries a Baa1 rating, which on the Moody's scale is at the lower end of investment grade.

However, the ratings service said it is encouraged by "recent improvements to BAC's profitability and management's commitment to a conservative risk profile."

Moody's also said the bank is shaking loose of the mortgage legacy and litigation issues it had that were related to the financial crisis. Bank of America's purchase of Countrywide Financial, in particular, left it with costs related to mortgage improprieties.

WATCH: Jamie Dimon and Mike Mayo agree: The banks are great