Why you should be overweight U.S. banks

The glory days might be over for financials, however the outlook for the sector continues to look pretty bright.

U.S. banks, for instance, look very different than they did prior to the financial crisis. They\’ve lower leverage and returns on equity, face regulatory and legal headwinds, and are coping with weaker loan volumes and softer trading profits.

Yet Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, believes these problems are well understood by the market and therefore are therefore fully reflected in current valuations.

His overweight recommendation for that banking group is based in large part with an improving interest rate outlook, as banks should see net interest margins climb with rising yields.

But Mr. Golub also thinks other facts will drive better performance by U.S. banks, such as improving loan performance as defaults and delinquencies fall further, which should make lending more profitable.

The strategist highlighted improvements in loan growth as a result of looser standards, which should lead to a pick-up in commercial loans.

Also within the banks’ favour is a more positive legal environment, because the worst from the litigation expenses related to the financial crisis have likely passed, and the number of mortgage-related cases in courts has steadied of late.

In terms of valuations, Mr. Golub noted that financials de-rated following the financial crisis, so that they are now attractive relative to historic price-to-book levels, as well as versus other sectors on the price-to-earnings basis.

Finally, banks appear positioned to come back more capital to shareholders via both dividends and share buybacks.

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