Banking M&A Coming to Boost Earnings, RBC Capital's Cassidy Tells CNBC
NEW YORK (TheStreet) -- Capital markets activity is receiving a boon in the form of better-than-expected earnings from big banks such as J.P. Morgan (JPM) - Get Report and Wells Fargo (WFC).
Gerard Cassidy, RBC Capital Managing Director of Equity Research, believes that there will be a slew of mergers and acquisitions in the next 18 months if the current environment prevails.
"The big regionals will start to merge with one another to get the cost savings to drive the earnings higher," Cassidy said on CNBC's "Squawk on the Street:" "Any bank that's not earning its cost of capital, which we argue is around 9% to 10%, if the ROE is in the 6%, 7%, 8% range, you have to wonder if they'll be vulnerable."
Cassidy thinks that if the 10-year yield curve continues to flatten then banks will continue to combat headwinds, saying "most investors are looking at the yield curve and what the Fed will do with rates."
"The interest rate environment is critical because it does impact the net interest margin," Cassidy noted.
Additionally, the positive trend in the second quarter of 2016 is making it "much better" than the first quarter, as Cassidy says "oil is not as much of a problem" compared to how it was "weighing on the stocks ... six months ago." In the first quarter, energy companies had to boost reserves due to actions by regulators, which made the price of oil more volatile than in the second quarter, where prices have stabilized in the $40 range.