Banks Oversold, Muni Defaults Still Coming: Whitney

It's no big surprise that most U.S. banks made it through the recent stress tests, according to analyst Meredith Whitney, who told CNBC the stocks are still oversold and better buys than their smaller competitors.

Meredith Whitney
Jin Lee | Bloomberg | Getty Images
Meredith Whitney

With the exception of a few large institutions with balance sheet and earnings problems, the founder of the Meredith Whitney Advisory Group said the banks should be trading around book value.

Her comments came a day after the Federal Reserve announced that 15 of the top 19 American banks met capital levels that would allow them to survive a Depression-level economic crisis.

But while she said there is room for gains, Whitney also issued a dose of caution about how far the companies can go.

"The banks should trade at tangible (book value) or a little better," she said. "But that doesn't mean they're off to the races and that there's tremendous momentum behind the fundamentals of these banks."

While the stress-test banks provide some value — JPMorgan Chase is among those Whitney's firm has rated a "buy" — Whitney thinks investors can find better buys elsewhere.

She recommending focusing on "heartland investments" that will benefit as U.S. economic growth outpaces that of other countries.

Specifically in financials, she considers SunTrust Banks and Citigroup among the weaker names, while she praised Discover Financial Services and American Express.

She also said the large caps are better buys than the overbought banks in the small- and mid-cap range.

It was her Citigroup call five years ago that first brought Whitney to national prominence, when she said the bank was plagued with toxic subprime mortgage assets.

More recently, though, she is noted for predicting a wave of municipal bond defaults that has yet to materialize. She continues to back the call, however.

"There's been so much backroom political maneuvering to keep these cities from going bust...There's been every effort on the part of states to prevent really this tidal wave of defaults which is going to happen sooner or later," Whitney said. "If people want to tell me 'you're wrong because this hasn't played out,' stay tuned."