Summary

Portales partners have been tactically defensive since last fall, bearish since winter, and now are looking to buy bank stocks on weakness. They recommended Wells Fargo at the start of the year, and it has been the best performing bank stock. The correction relative to the market is over and banks are creating value and looking attractive. However, one should expect a difficult transition in market leadership as the FED goes from providing liquidity to removing it, resulting in economic slowdown but in their view, no recession. Portales does need see much improvement in the operating environment for banks in Q2, but Q3 will begin to see positive operating leverage and positive year over year growth, in what they call PP&R - net revenues minus expenses. This has shown high correlation with bank stocks performance. In their view, bank stocks will outperform in a corrective market, driven by improving operating leverage, margin improvement and loan growth, and finish the year with very strong performance. In terms of risk, credit quality is a concern to the market. The fear is the FED will overdo tightening and force a recession. Banks have managed risk in this cycle better than in previous cycles and balance sheets are strong. Portales forecast higher credit costs but not to the level of previous recessions. Banks will be re-valued upward when their improved risk management becomes evident.

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