Veteran Forecaster Dick Bove Reveals When You Should Buy Tanking Bank Stocks
Investors in bank stocks should assess the sector the way they would any other, namely by seeing how well banks are doing selling their products. Because what banks mainly sell is loans, and because loan growth is stalling, that's a good reason not to buy, Wall Street bank analyst Dick Bove told TheStreet.
Commercial and industrial loans, which grew by an average expansion rate of 10.6% from 2012 to the beginning of 2016, fell to a 2% growth rate in May, according to the Federal Reserve.
Total loans and leases by U.S. commercial banks were rising at an annual pace of about 5% in February, based on weekly seasonally adjusted data, the Wall Street Journal reported. That was down from the 6.4% rate for all of 2016 and peak rates of around 8% in mid-2016.
That explains why, even though banks mainly reported robust second-quarter earnings, passed their stress tests, hiked buybacks, and saw easing regulation, a majority of large cap bank stocks fell from March 1st to September 1st, Bove said.
"Loan losses are increasing, that's why the stocks went down," Bove said. "Until we see any tangible evidence of an increase in loan volume, until those numbers start going up, you do not buy them."
From March 1st until September 1st, shares of Goldman Sachs (GS) - Get Report , Bank of America (BAC) - Get Report , JPMorgan (JPM) - Get Report , Wells Fargo (WFC) - Get Report and Morgan Stanley (MS) - Get Report all fell. The Financial Select Sector SPDR Fund (XLF) - Get Report and the KBW Nasdaq Bank Index (BKX), both tracking financials, are lower in that time frame as well.
Losses from loans that borrowers failed to repay crept upward in the second quarter from a year earlier, spurred in part by defaults on credit cards as U.S. banks loosened their standards and offered revolving accounts to applicants with lower credit scores.
Lending more credence to the idea that interest rates are not the principal catalyst for these stocks is the Federal Funds Rate.
"The effective Federal Funds Rate is up 90 basis points from 2015 to present," Bove noted. This usually encourages investors to believe bank profits will rise because the difference between what banks pay to borrow and what they earn from lending, called the net interest margin, is growing.
However, Bove said, the average net interest margin, is still well below the average for the U.S. banking industry. "So, clearly, there is something wrong with the way people think of interest rates and banks," Bove said.
"My view is that the move in interest rates by the Fed is driven solely by the markets," he said. "The only thing I can think of is that they are focused heavily on the equity markets, they seemed to be concerned about the growth in stock prices. So, if that is true then the probability of them raising rates might be greater."
Ultimately, "I think the balance sheet is the issue; it's not monetary policy."
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