Tags: bove | regional | bank | stocks

Dick Bove: ‘Crazy’ Not to Be in Regional Bank Stocks

By Nancy Stanley   |   Tuesday, 24 Jul 2012 08:38 AM

Regional bank stocks are the place to be, according to Dick Bove, banks analyst at Rochdale Securities, while capital-markets companies are the worst place.

Bove broke down the banking sector into four categories: regional banks, trust banks, capital markets companies and universal banks.

Regional banks have had better-than-expected earnings in their latest quarter, according to Bove.

“In fact, they were picture-perfect quarters for companies like Wells Fargo & Co., BB&T Corp. and U.S. Bancorp,” he told CNBC.

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Trust companies, such as Bank of New York Mellon Corp. and State Street Corp., also had reasonably good quarters, though not as good as the regional banks had.

“They showed forward momentum, but not as much as we’d like to see,” he noted.

Capital-markets companies were “disasters,” Bove said.

“Their trading operations were horrendous. Their investment banking capabilities were not in play at all,” he stated, adding that these conditions are expected to last through the third quarter.

Universal banks, such as JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp., incorporate all of the above-mentioned types of companies.

“They are regional banks, trust banks and capital markets companies,” he said. “They were kind of flattish this quarter."

“The problem with bank stocks is not anything to do with earnings or the structure of their balance sheets, the problem with bank stocks is that people don’t believe any of the numbers associated with this group of companies,” Bove told CNBC.

“Everybody would argue that Citigroup is a basketcase. It’s a company that was literally bankrupt five years ago,” he noted. However, Citigroup made more than $11 billion in net income in 2011.

“And they’ll make more money this year than they did last year,” he said, adding that there are only 15 companies in the United States that make more than $11 billion.

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“Here’s a company that the market constantly denigrates, constantly thinks is in trouble,” Bove said. “But it is making more money than virtually 99.9 percent of the companies in the United States.”

I addition, Bove noted, JPMorgan makes more money than all but five companies in the United States.

“This year, they will be among the top 10 money earners of all companies in the United States, and they will be No. 2 or No. 3 in terms of bank earnings in the world,” he added.

However, investors in universal banks need to have a “strong stomach.”

“If no one cares about how much money these banks make and no one cares about what the growth rates have been coming out of the recession, it’s very difficult to see what’s going to get them to buy the stocks,” Bove stated.

“It’s crazy not to own regional bank stocks right now,” he said. “The quality of earnings is extraordinarily high. It’s coming from more loans and more deposits.”

Along these same lines, Warren Buffett has avoided investing in large investment banks and instead invests in traditional lenders, which has led to his financial sector share investments greatly outperforming most other investors, TheStreet.com recently reported.

One of his largest holdings is in Wells Fargo, which accounts for the second-largest stock investment for Berkshire Hathaway—at $13.2 billion—and is 7.4 percent of Wells Fargo’s shares.

While many of the mega-bank stocks doubled or tripled in value after the 2008 market crash and a March 2009 bottom, many analysts predicted that those gains could be replicated.

However, these shares turned upward on misplaced optimism of a durable trading or a deal-making surge and ultimately have underperformed.

Since May 2009, shares of Wells Fargo, U.S. Bancorp and M&T Bank Corp. have outperformed, with Wells Fargo up more than 30 percent and U.S. Bancorp and M&T both up more than 50 percent.

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