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Something Could Go Right in Banking

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The name Dick Bove may not ring bells for many investors, but if you're sniffing around the stocks of U.S. banks, it's a good name to know.

It's certainly not the only name to know, as folks like Meredith Whitney and Mike Mayo, as well as some of my Foolish colleagues, including Morgan Housel, have had some interesting things to say about the financial industry. Bove, however, is particularly notable because of his persistent confidence in the banking and financial sector. Bove is senior vice president of equity research at Rochdale Securities.

In fact, the title of this article comes from something that jumped out at me in a recent interview Bove did with Steve Forbes. Bove said:

I think the people in my industry and people in your industry are having a hard time getting their mind around the fact that something could go right in banking. In other words, the whole driving force, so to speak, among analysts is, "Find that thing that no one else found yet that is bad about banks. The credit card thing is bad; the commercial real estate thing is bad. You know, they've changed the accounting laws. But find that thing and drive these stocks lower."

Where does he get his crazy pills?
Positive on banking? Isn't that like saying you'd like to buy Bernie Madoff a beer?

Now it's notable that not everything Bove says about banks is lollipops and unicorns. In fact, he just recently reduced his 2009 estimates on both JPMorgan Chase (NYSE: JPM  ) and Goldman Sachs (NYSE: GS  ) , partly due to the fact that both will face costs associated with their TARP paybacks.

But looking longer term, he seems to like pretty much all the big boys in the sector, from the two above to the more-troubled Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) .

And he may not be all that nuts. Psychologists have found a wide array of forces that can color people's thinking and cause them to incorrectly interpret situations. The availability heuristic, for example, has shown that people often predict probable outcomes based on how easily an example of the outcome can be brought to mind.

In the case of banks, analysts could be overestimating the potential for future bad outcomes in the industry simply because they can so easily call to mind the recent devastating losses.

Or the good old bandwagon effect could be at play. As the name suggests, this bias causes people to believe something simply because many other people believe the same thing.

As more and more analysts seem to settle on the conclusion that financial institutions from Capital One Financial (NYSE: COF  ) to Wells Fargo (NYSE: WFC  ) are in for more tough times, it becomes increasingly difficult for folks like Bove to jump out of step and suggest exactly the opposite.

These two biases could also be working in conjunction, with recent events coloring future expectations and the preponderance of analysts coming to that faulty conclusion, making it much easier for additional analysts to jump on the same off-kilter bandwagon. That is, of course, assuming that Bove isn't simply dead wrong.

Is there an antidote in the house?
If he's right, the most obvious course of action is for those who are still shorting the financial sector to step aside to avoid getting hit by an oncoming train. Bove has suggested that Citigroup could eventually head toward $12 per share, a quadrupling that would deliver more than a flesh wound to a short-seller unlucky enough to be on the receiving end.

For the rest of us, though, it means that it may be worth revisiting the murky world of U.S. banking. If Bove is correct, the banking sector may continue to struggle through this year, but then find itself on the winning end of rapidly expanding earnings once loss provisions start to settle back down. At that point, investors are likely to flock to the sector.

The banks we could expect to pay off the most are those that have been beaten down the most and carry the lowest valuations. Citigroup and Bank of America would certainly qualify, but JPMorgan, Fifth Third Bancorp (Nasdaq: FITB  ) , and M&T Bank are also among the financial institutions trading below book value.

But don't take his word for it
Relying blindly on an analyst -- whether it's Bove or anyone else -- for your investment decisions is a recipe for disaster. While the analyst's initial call may be well publicized, subsequent changes or a complete reversal may not be, and that could leave you out in the cold. So if you like the sound of Bove's conclusions, use them as a jumping-off point for your own research into specific banks or the macrofactors of the financial industry.

And if you want to get a few more opinions on which stocks look interesting in the financial world, check out what the 135,000 members of the CAPS investing community have to say about the industry.

Further Foolishness:

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool’s disclosure policy has never once been caught with its pants sloppily creased. Of course, it doesn't actually wear pants …

Read/Post Comments (16) | Recommend This Article (55)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2009, at 2:25 PM, JackJohnJohnny wrote:

    Maybe you should go back and review Bove's history on his banking calls and you may change your mind. For example: Strong Buy on C at about 55 and rode it down all the way (with a personal comment on CNBC that at 18, this is the buy of a lifetime!). Maybe that's why he's gone through 3 or 4 firms and losing his job! Feel free to check his past calls on Upgrades/Downgrades. I think it starts at, 24-Sep-04 Punk, Ziegel & Co Initiated Buy, and he's been consistantly wrong on the entire sector!!

  • Report this Comment On June 30, 2009, at 3:01 PM, TMFKopp wrote:

    So what you're saying is that because he was wrong in the recent past we shouldn't consider his arguments at all? The guy has been at this a heck of a long time (40-plus years), so it seems to me that completely dismissing him might be a short-sighted approach.


  • Report this Comment On June 30, 2009, at 4:59 PM, leohaas wrote:

    "The banks we could expect to pay off the most are those that have been beaten down the most and carry the lowest valuations. Citigroup and Bank of America would certainly qualify, but JPMorgan, Fifth Third Bancorp (Nasdaq: FITB), and M&T Bank are also among the financial institutions trading below book value."

    Who would be so naive as to trust book value for a bank right now, especially since mark-to-market is no longer the rule?

  • Report this Comment On June 30, 2009, at 5:07 PM, minduza wrote:

    he says that Bove was wrong to many times to qualify as credible source, if he made life time calls on C at $18 he or his clients probably made investments at that price, so he tries to talk up his bad investment. Of course I wouldn't suggest shorting any financials. I don’t think US government will let fail any of large banks.

  • Report this Comment On June 30, 2009, at 5:08 PM, Jdelaney634 wrote:

    He is a joke that has been positive on financials since before the crisis occured and currently playing the broken clock card. I will give him credit for being a self promoter by going against the grain, but not my $ to invest.

  • Report this Comment On June 30, 2009, at 5:27 PM, plange01 wrote:

    bac and c are starting to look a lot better.the companys themselves are not that bad anymore. the main problem seems to be the poor performance from the ceo's and thats easy to fix!

  • Report this Comment On June 30, 2009, at 5:43 PM, LakeJuJu wrote:

    Does anyone think the banking industry will come back within this year, and also, since they are trading for dollars, which is the best one at this time?

    Would love some more input.

  • Report this Comment On June 30, 2009, at 6:26 PM, jc09058 wrote:

    Zombie Banks, Dead Banks, etc. and yet a lot of effort is being made to keep them alive. A good thing too because a cascade failure of banks would be a God awful thing to see. Personal experience from the mid-80s and family experience during the bank failures at the beginning of the Depression.

    Despite what is happening, these banks are viable and have a good potential to recover because of these efforts. That doesn't mean there aren't more issues coming home to roost but the alternative is NOT something I would wish on anyone.

    So, Dick Bove is making a call for better times? Cool because there is a reasonable chance he is correct. Enough of a chance that I am risking some of my money. He's made bad calls in the past? Big deal and who hasn't blown a call or three. I know I have.

    All of the TARP banks got beaten down as we have seen recently. Yet all of them reached a point where their share prices stabilized. Have they continued to drop at the same rate lately as they did six months ago?

    Despite the best effort of the news and those shorting these stocks, the prices have started an upward trend. A VERY LONG term of small incremental upward trends. If the market is unable to beat the prices down any further then there is only one other direction to go and that is up.

    Do I expect things to recover as quickly as they fell? No! If they did I would be worried about the effects of the suspension of mark-to-market is having on the books. While I am speculating on the banks recovery, I will still keep a strong weather eye on each and every quarterly report as anyone should. Whether I or anyone else is invested in the banks or not.

  • Report this Comment On June 30, 2009, at 9:20 PM, jesse2159 wrote:

    If the US government didn't jump in to save them, Citi and BoA would be history. As for the rest of the banks? Don't bet on them recovering too quickly. As one astute observer on this post mentioned; with the mark-to-market rules tossed out, banks can seem downrigh flush with profits. Remember, they don't have to produce actual sales of actual products, only write down what they "think" their assets are. And, as history has shown, banks do not product the sharpest financial minds. I'll pass on this tidbit of nonsense.

  • Report this Comment On June 30, 2009, at 10:19 PM, xetn wrote:

    For a completely different take on the future of GS you might wish to read:

    It will completely blow your mind. You be the judge, but beware, it is a lengthy review of this company's methods.

  • Report this Comment On June 30, 2009, at 10:44 PM, jeffgar1 wrote:

    I don't want to get too far off subject, but I think the investment world, the government at large, and all advisiors like to treat us all like we are fools. Todays corporate structures are bleeding the market and outsourcing to further shutdown the economy. Come on , "the depression", give me a break, Dows within all the metrics to take us for a ride again, banking failed becuase it was due, because the they all woke up one day and let it happen to try to take the new president down. Our entire system bites the big one, who wants non guaranteed investments, a market that can't handle todays sensitivity, and a class that cares only about profits. Americas down the drain, and she deserves it. She keeps it up, and its gonna take a re-build within like we have never seen before.

    Corporations as they exist today are outdated if we expect to survive, but once again they will figure out to blow holes in the laws on purpose to manipulate it to their advantage......Honor, to say the least is a memory...........Social Security, mathematically --somebody owes the system Trillions of dollars, but our sorry crooks are gonna trance us into beleiving it was an error, when in reality it's another write off in the minds of "todays radical kingdom of lets wreck it, Americans are too busy and dependant to care......"

    GMB/ 2009

  • Report this Comment On June 30, 2009, at 10:48 PM, oSUNo wrote:

    If they're relying on a consumer/MFT/commodity/real estate - driven new bubble I think they'll be waiting a while. Already I am seeing no doc loans starting to be pushed again. To jump back in like it was 2004 would just be to re-live 2008 again in another four years.

    A contrarian bull call is not hard to make, because he's missing the point.

    People are discussing and demanding investigation and action of the bank's role in 2008.

    That doesn't mean they're bears on the finance industry.

    To equate the two as being one and the same is intellectually dishonest.


  • Report this Comment On July 01, 2009, at 11:13 AM, plange01 wrote:

    fire vikram pandit at citi and something will go right there!

  • Report this Comment On July 03, 2009, at 11:43 AM, max12345 wrote:

    Citibank is very likely to trade at least at 10 within two years and Lloyds TSB at least at 20. Neither of them is going to go bust and Lloyds will also pay a hefty dividend. The time to buy both of them is now. (for those who didn't have the nerve to buy Citi at just over a dollar and are now already wishing they had)

    And maybe also Royal Bank of Scotland and Allied Irish Banks both of which lots of folks were saying would go under and far too soon regretted investing in them (including Warren Buffet) ...both are now up dramatically and are sure to only rise further.

    Basically it takes three ingredients (apart from human intelligence) - to produce all the stuff that other companies produce: money, energy and materials; and many companies that provide these three indispensable ingredients are all selling for dirt cheap at the moment, so what to do is really not rocket science.

    Buy what has been beaten down but you know will not go under and just wait a year or two. (while everyone else pulls their hair out at every market movement up or down)

  • Report this Comment On July 03, 2009, at 2:56 PM, blueskyAZ wrote:

    In the present environment, the banks are awesome earnings machines. They borrow money at zero and lend it out at 5%. Even a banker can make money. Smart investors will seek banks that have substantial revenues from non risk fee income. BAC receives 55% of revenues from fee income and 45% of revenues from interest income. FITB has a gigantic credit card processing business which provides very stable revenues and this business partnered with one of the biggest VCs in the world - Advent of London, UK to rapidly expand this business throughout the US. In addition FITB has one of the largest asset management businesses in the mid west managing a whopping $166billion. The banks manages money for private individuals, corporations, non-profits, endowments and other institutions. That means fat, stable fee income from asset management. Both of these banks have huge incomes from stable, non risk businesses. That is important to me as an investor and these stocks will pop to soar many multiples of their current share prices. Furthermore as you will see this Q2 earnings season, all the banks will be reporting higher revenues and top line growth is the only indicator of a growing company. Good luck finding top line growth in any other sector and that includes tech. The banks are the money machines of the present times. The icing on the cake is that many smaller banks folded so the competition for the big banks is going away. Less competition equals higher profit margins. FITB also mopped up a big bank in 2008 and acquired a huge base of new deposits. I am very bullish on both banks because I like a strong proportion of revenues to be recurring, stable and non-risk because that tells me such banks will have a huge stable earnings pipeline for the future.

  • Report this Comment On July 06, 2009, at 2:16 PM, Big50Shooter wrote:


    Thanks for the link... VERY eye opening!!!

    I've been wondering who was pushing that oil bubble last summer... Now (it appears) I know...

    That story make me want to break out the Big 50....

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