The bank trade is back on, and JPMorgan and Morgan Stanley will benefit most, Credit Suisse says

After struggling through most of 2017, bank stocks are ready to break out, according to a Credit Suisse analysis.

“Improved prospects for tax cuts, and more importantly, progress on regulatory reform,” are the main drivers that will see an at least 10 percent return ahead for select stocks, analyst Susan Roth Katzke and others said in a research note.

The firm says Bank of America, JPMorgan Chase, Morgan Stanley and Citigroup will be the main beneficiaries of a suddenly improving climate for the $ 16.5 trillion banking industry. Analysts raised Morgan Stanley to outperform from neutral and SunTrust to neutral from underperform, while cutting Goldman Sachs to neutral from outperform even though it raised its price target for the firm.

In addition, Credit Suisse changed price targets for several other banks (only Northern Trust was lowered):

“We’ll continue to assess valuations cognizant of the economic cycle, but equally as willing to embrace the changing operating environment, inclusive of the improved prospects for regulatory reform,” Katzke wrote. “We strongly favor the universal banking model, with its multiple levers for growth and greater potential for realization of scale economies.”

Bank stocks surged following President Donald Trump‘s election victory in November. Investors believed the Republican would push a pro-growth agenda that included lower taxes and less regulation that would drive interest rates higher and promote a positive environment for financials.

That agenda largely stalled as Trump has bickered both with Democrats and his own party. Consequently, banks have underperformed, with the SPDR S&P Bank ETF gaining just 4.3 percent this year while the broader S&P 500 has roared to a nearly 14 percent gain.

The Credit Suisse analyst sees the picture getting better.

One impetus for that stance was a white paper the Treasury Department released last week containing its recommendations to ease bank regulation. While the paper largely got lost in the headlines of the Las Vegas mass shooting and the daily drama coming out of Washington, it was viewed within the banking industry as an important sign of a more relaxed environment to come.

Among other things, the Treasury recommendations are “aimed at both decreasing the burden of statutory stress testing and improving its effectiveness by tailoring the stress-testing requirements based on the size and complexity of banks.”

Generally, they call for evaluating mandates, looking at how the sector can help the economy, “reducing regulatory burden by decreasing unnecessary complexity,” and getting financial regulators to work together with less duplication.

“Actions thus far are not enough to impact estimates; they are sufficient to support a more optimistic bias, and perhaps all the more so with the confirmation of Randal Quarles as the Fed’s vice chairman for supervision last week,” Katzke wrote.

Big banks will report earnings this week, with JPMorgan Chase and Citi on top Thursday and Bank of America, PNC and Wells Fargo up Friday. Financials broadly are expected to show annualized growth of 4.3 percent, though that number has been slashed from the 10.1 percent originally expected, according to FactSet.

WATCH: Analyst Mike Mayo talks about the future of bank regulation.

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