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The booming inventory market and the “credit score euphoria” will drive banks to sudden earnings, predicts prime analyst Mike Mayo

Top analyst Mike Mayo believes Wall Street is underestimating financial stocks ahead of the earnings season.

Mayo, who runs large-cap banking for Wells Fargo Securities, says investors haven't fully realized the benefits of the booming stock market – from mergers to asset management fees.

"It's bull market banking," the company's CEO told CNBC's Trading Nation on Thursday. "It's a good time to be a long bank."

His outlook comes from his enthusiasm for financial stocks. The SPDR S&P Bank ETF just had its fourth positive session of five, up 0.77% on Thursday. For the past three months it is now up more than 10% while the S&P 500 is up about 1%.

Two of Mayo's top picks, JPMorgan Chase and Bank of America, are also on the puff. JPMorgan stocks are trading at all-time highs and Bank of America is at levels not seen since February 2008, months before the credit crunch.

Still, Mayo is still questioning investor attitudes towards banks.

"This is day and night against the global financial crisis"

"You have credit euphoria. I mean, that's day and night compared to the global financial crisis," he said. "Banks stumbled after getting out of the crisis. Now after the pandemic, banks have been a source of strength and in some cases they should have the lowest loan defaults in history."

Mayo is a leading institutional investor analyst. From 1999 to 2016, Mayo had a sales rating for the banking sector. In early 2010, he testified before the Financial Crisis Inquiry Commission, which was formed after the 2008 credit crunch.

His bullish stance on banks has now spanned several years.

"Banks played very good defenses during the pandemic," he said. "Now the banks are ready to play offensively."

His positive outlook on the industry has one caveat: credit growth may take longer than expected. However, Mayo views this as a temporary setback tied to supply chain disruptions and the inventory growth impact that is known to boost lending. He also names the delta variant of Covid as a headwind.

"It may take some time. But it will probably come back," Mayo said. "That's why I'm going to interview the management teams during the conference call."

He also monitors the impact of inflation on the banking sector.

"Once rates go up and the yield curve steepens and the short end gets higher – that will be a boon to banks and their net interest margins," Mayo said. "This is going to be great. If you have too much rate hikes and inflation now, this could eventually become hell."

Mayo suggests that it is too early to seriously consider this scenario. Its baseline scenario is that advances in technology make banks more efficient and drive them into the multi-year bull market.

"This is the most underestimated point about banks … They have spent the last decade upgrading themselves to technology," Mayo said. "We are very strong on the technology revolution in banks and prefer those banks that look good not only in the short term but also in the long term."

He also counts Goldman Sachs and PNC Financial among his top games as the winning season approaches. It starts with JPMorgan's quarterly results on Wednesday.

Disclosure: The Wells Fargo Securities analyst and / or family and the company owns shares in the above bank stocks. Wells Fargo has investment and non-investment relationships with the companies, forms a market for their common stock, and has participated in public security offers.

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