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'Bank stocks have recession prices without a recession,' Wells Fargo's Mike Mayo says

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A 'phenomenal' opportunity is materializing in bank stocks: Mike Mayo

Top banking analyst Mike Mayo is advising investors to buy beaten-down financials — not sell them.

"U.S. bank stocks have recession prices without a recession," Wells Fargo's managing director of large cap banks told CNBC's "Trading Nation" on Wednesday. "Valuations sure are attractive here."

Mayo, who is one of Institutional Investor's most accurate analysts, isn't denying lower Treasury yields are creating risks for the space. However, he doesn't see the bearish scenario sticking around more than a few months.

"There is likely to be near-term pain if the current rate environment stays at the current level," Mayo said. "There could be a little pain as people incorporate potentially lower earnings estimates into the next quarter ahead."

And, he believes the bearish backdrop could change on a dime.

"You're always one tweet away," said Mayo, referring to President Donald Trump's Twitter habits. "You reconcile the trade agreement with China, and then this is a very sensitive group on the upside."

In a note this week, Mayo focused on his bullish risk-to-reward scenario for bank stocks over the next one to three years. He acknowledged the "very rapid decline in the 10-year Treasury yield ... coupled with the Fed July rate cut, increases the risk that bank net interest margins could decline more than expected" in the third quarter.

But Mayo added the latest Fed stress test results is reassuring that record high capital will remain.

"Look, there are tail risks in both directions," he said. "So, short-term caution, [but] long-term phenomenal opportunity."

Citigroup stock could 'double'

Mayo, who does not have a single sell rating in his coverage universe, picks Citigroup as his best long-term play in this environment. The stock has tumbled by more than 8% over the past five trading sessions and is now down 10% over the past 12 months.

"Citigroup is buying back more stock than ever before relative to its market cap. It's really crazy," he said. "They should be selling the forks, the spoons, the silverware for their dining rooms to buy back more stock. They should be selling office chairs. They should take pictures off the walls. I mean it's that attractive."

By buying back stock below tangible book value and cutting costs, Mayo predicts the bank's shares will rip higher.

"This stock could double over the next three to four years," Mayo said.

Disclosure: Wells Fargo owns shares of Citigroup and has an investment banking relationship with the firm. The research analyst or a member of the research analyst's household has a long position in the securities of Citigroup. Wells Fargo has been involved in a public offering of securities for Citigroup over the past 12 months.

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'Bank stocks have recession prices without a recession,' Mike Mayo says