6 Bank Stocks to Buy Now Before They Snap Back, Says BMO Capital Markets

Editors' Pick: Originally published Feb. 16. ByLaurie KulikowskiFollow | 02/21/16 - 10:52 AM EST

Bank stocks have reacted strongly to the global market meltdown, and analysts from BMO Capital Markets, a division of the Bank of Montreal, are making a case for six financial sector stocks that have high potential to "snap back."

"U.S. equity markets (and bank stocks in particular) over-reacted so far this year to what we consider as misplaced economic concerns," according to a report out Monday by the group. "[Bank] valuations should recover."

"Misplaced" concerns by investors include "the possibility that slowing Chinese growth may lead the U.S. economy into a recession (some even forecast a depression), inspiring credit quality deterioration, the freezing of wholesale funding markets, and the failure of major financial counter-parties," the report said.

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As of Friday, the S&P 500 fell roughly 9% this year, while large-cap banks and specialty finance companies are down 21% and 19%, respectively, BMO analysts write.

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But the analysts note that aside from energy-related loans, bank credit quality is still improving, while capital is strong across the U.S. financial system.

"Despite pockets of obvious concern (e.g., energy-related loans), we forecast fundamental credit quality (as measured by [non-performing asset] formation rates) to continue to improve (albeit at a decreasing pace) across the U.S. financial system," the note said. With tangible common equity to tangible assets greater than 9% in aggregate, "we consider U.S. banks capital strength to be more than adequate."

"Both observations -- improving credit quality and strong capital -- suggest that the equity markets may have over-reacted recently to misplaced concerns about credit and funding," the analysts wrote.

Here are six oversold bank stocks that BMO Capital Markets analysts believe have the highest "snap-back" potential. We've paired the list with commentary from Jim Cramer, if the stock is owned by his Action Alerts PLUS charitable trust portfolio. Year-to-date returns are based on Feb. 12, 2016 closing prices.