Top analyst Mike Mayo says Warren Buffett will be proven right with bank stocks set to rally 50%

Published Wed, Aug 5 20202:31 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Key Points

Wells Fargo's Mike Mayo told CNBC on Wednesday he sees strong upside for bank stocks in the next two years.
For that reason, the top analyst said Warren Buffett is "on the right track" with his buying spree of Bank of America shares.
"We think that bank stocks have the potential to increase by 50% over the next 18 to 24 months," he said on "The Exchange."

(This story is for CNBC Pro subscribers only.) Top analyst Mike Mayo told CNBC on Wednesday he sees strong upside for bank stocks in the next two years, saying famed investor Warren Buffett 's Berkshire Hathaway is "on the right track" with its buying spree of Bank of America shares. "We think that bank stocks have the potential to increase by 50% over the next 18 to 24 months," the Walls Fargo analyst said on "The Exchange." "I think it's underappreciated just how much heavy lifting the banks are doing and how they'll be able to pump their way through this." While the broad S & P 500 has actually risen nearly 3% in 2020, the SPDR S & P Bank ETF , which tracks the KBW Bank Index , is down about 33% as banks find themselves facing significant headwinds related to the coronavirus crisis. That includes near-zero interest rates and the prospect of widespread loan defaults due to economic pain felt by businesses and millions of Americans. "Banks are experiencing four 100-year events at the same time. The decline in the net interest margin, the worst in 100 years. The decline in traditional banking revenues, the worst in 100 years. The decline in total revenues, the worst in 100 years, and the build up of reverses has been the highest in history," Mayo said. Despite the scale of these challenges, Mayo said many of the U.S.'s largest banks are well-equipped to weather the storm. "When we talk about heavy lifting, banks right now have a level of reserves for problem loans equal to half the level actually experienced in the global financial crisis," he said. "We think the foundations are strong and earnings could be like a coiled spring if, and when, we have more of a positive light on the economy or a vaccine or some other measures that get the economy going." Mayo said the largest banks — such as Bank of America, JPMorgan Chase and Citigroup — are in the strongest position right now, compared to other financial institutions such as regional banks. "The theme is that the largest banks are capturing more share, especially when it comes to digital banking, and they also have more scale to better control expenses," he said. "So even while these revenue headwinds are once-in-a-100-year events, the ability to control expenses we think will distinguish this recession versus others."

(This story is for CNBC Pro subscribers only.)

Pedestrians pass in front of a Bank of America Corp. branch in New York.

Mark Kauzlarich | Bloomberg | Getty Images

Top analyst Mike Mayo told CNBC on Wednesday he sees strong upside for bank stocks in the next two years, saying famed investor Warren Buffett's Berkshire Hathaway is "on the right track" with its buying spree of Bank of America shares.

"We think that bank stocks have the potential to increase by 50% over the next 18 to 24 months," the Walls Fargo analyst said on "The Exchange." "I think it's underappreciated just how much heavy lifting the banks are doing and how they'll be able to pump their way through this."