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Bank stocks will soon yield more than the debt of developing countries like Mexico and Brazil

Key Points
  • The bank industry's projected 10% yield exceeds that of Mexico (8%) and Brazil (5%), and is equivalent to the yield from CCC-rated U.S. corporate debt, according to Wells Fargo analyst Mike Mayo. 
  • "U.S. bank stocks seem poised for upside with a favorable economic event, such as a steeper yield curve or a U.S. trade agreement," Mayo wrote. 
VIDEO4:4004:40
Wells Fargo Securities' Mike Mayo on bank stress tests

Large U.S. banks will soon have a total average cash yield of 10%, more than what the sovereign debt of countries like Mexico and Brazil pays, according to Wells Fargo analyst Mike Mayo.

Lenders including J.P. Morgan Chase and Bank of America are widely expected to increase dividends and share repurchases after the Federal Reserve discloses the results of the industry's stress tests on Thursday. The institutions passed the first round of the Fed's annual examinations last week.

The industry's 10% yield was calculated by adding up banks' projected dividends and share buybacks, divided by market capitalization, Mayo wrote in the June 25 note. The figure covers the period starting from the third quarter of this year to the second quarter of 2020.

"That 10% yield is off the charts and the highest level in history relative to the 10-year bond, which is at 2%," Mayo said Wednesday on CNBC's "Closing Bell."

At that level, it exceeds the yield from Mexico (8%) and Brazil (5%), and is equivalent to the yield from CCC-rated U.S. corporate debt, or junk bonds that have a "considerable risk that interest and/or principal will not be repaid," he wrote.

It also exceeds the yield of emerging markets high-yield credit (7.5%) and most other bond categories, where yields have been suppressed as central banks around the world maintain low interest rates.

"Investors seem unimpressed at the moment given sluggish 2Q19 capital markets," Mayo wrote. But "U.S. bank stocks seem poised for upside with a favorable economic event, such as a steeper yield curve or a U.S. trade agreement."