Investors aren’t too fond of bank stocks this year.
The S&P 500 financials sector is down 2.6% year-to-date, compared to the S&P 500’s (^GSPC) 2.9% gain.
That’s because investors have been expecting “dessert” from banks instead of focusing on the “main course,” according to veteran bank analyst Mike Mayo of Wells Fargo Securities.
“This [upcoming round of bank earnings] should be like the last — the main course is decent but then there’s a little bit of a lack of dessert,” he said in an interview with Yahoo Finance.
Mayo defines the main course in a few ways: good cost cuts and a decent capital return. The dessert, he said, is improving loan growth and margins. These are things that should have happened from the recently passed tax cuts.
But Mayo isn’t worried about the lack of dessert, which is a symptom of the banking sector’s more cautious approach to lending as a result of the 2008 financial crisis. Put simply: banks are being more prudent. And that’s good for the long-term, according to Mayo.
“Investors inappropriately rewarded too much revenue growth before the financial crisis,” Mayo noted. “Now they’re penalizing banks for a lack of revenue growth. Slow and steady wins the race.”
And Mayo’s long-term outlook on banks is bullish.
He expects Citi’s stock price to double over the next four years.
“They have one of the best improving returns on equity and one of the best reductions in the cost of capital,” he noted.
He also expects at least 50% upside in shares of Bank of America (BAC) and JPMorgan Chase over the next three years.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.