Analyst Bove Bumps Up Banks

Punk Ziegel's Richard Bove raises ratings on six stocks, and the troubled sector gets a lift.
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Financial stocks were rebounding Tuesday, aided in part by a newly sunny outlook from an analyst who recently has been down on the sector.

Punk Ziegel's Richard Bove, the outspoken equity analyst who has irritated more than one management team over the years with his often contradictory perspectives on the financial industry, has improved his outlook on six bank stocks.

In an industry note, Bove upgraded

Washington Mutual

(WM) - Get Report

and

KeyCorp

(KEY) - Get Report

-- two banks hit hard by the mortgage crisis and credit crunch -- to market perform from sell. He placed buy ratings on

PNC

(PNC) - Get Report

,

BB&T

(BBT) - Get Report

and

Regions Financial

(RF) - Get Report

.

In a separate note on troubled banking titan

Citigroup

(C) - Get Report

, a stock he has long championed, Bove also raised his rating to buy.

Bove, in his industry note, says that the rating changes are based primarily on "valuation assumptions rather than improving fundamentals." But earnings may be at a trough for some of the hardest-hit banks, and the negative sentiment on most banks already has been priced into their shares, he said.

Shares of Washington Mutual, KeyCorp, PNC and BB&T rose between 2% and 4%. Regions surged more than 7% on the news.

Bove's note did not seem to bolster Citi, which also received good news Monday night when the bank

sold a $7.5 billion stake to the funding arm of the Abu Dhabi government. The stock was down fractionally to $30.45 in Tuesday morning trading.

As the credit crunch intensified this summer, Bove was one of the first analysts to slap sell ratings on the big Wall Street brokerages, including

Bear Stearns

(BSC)

,

Merrill Lynch

(MER)

,

Morgan Stanley

(MS) - Get Report

,

Lehman Brothers

(LEH)

and

Goldman Sachs

(GS) - Get Report

. His downgrades came after the Bear Stearns' announcement this summer that two of its hedge funds were essentially worthless.

Bove has since upgraded Bear Stearns, Goldman and Lehman to market perform.

Bank and mortgage lender stocks have been pummeled this year as housing prices declined and borrowers increasingly default on their mortgage loans. The seize-up of the mortgage-backed securities markets is another major factor hurting lenders that have relied on the secondary markets to sell their mortgage loans. Banks also have taken billions of dollars in writedowns as mortgage-related securities have declined in value.

As one of the largest consumer lenders, the Seattle-based Washington Mutual had to set aside $967 million in the third quarter to cushion against greater loan delinquencies on subprime mortgages and home-equity loans.

WaMu recently painted an even bleaker future for itself and the housing market after its CEO Kerry Killinger said he expected "today's challenging housing market conditions to continue through 2008," at an investor conference this month. The company added that its provision for future loan losses in the fourth quarter and into next year is expected to be more than $1 billion.

"The price of Washington Mutual's stock has literally dropped 50% since it was downgraded a few months ago," Bove writes in the note. "The earnings forecasts have been dramatically reduced and it is my belief that the dividend will be cut in half. However, the issue is now yielding 13.3%, reflecting the belief that the dividend will be reduced, and the stock price is reflecting losses, not profits."

"I would not buy this stock, but I no longer want to sell it," Bove writes.

Profit at the Cleveland-based KeyCorp plummeted 33% last quarter, also from credit losses in residential real estate as well as writedowns in its trading business.

But while KeyCorp's earnings "may only be slightly ahead in 2008," they will be "meaningfully higher" in 2009," he writes in a note. "This is another stock that has overshot on the downside."

In rating BB&T buy, Bove said that the company's stock is "too cheap" and that "it should be bought."

The Winston-Salem, N.C.-based bank "is located in one of the stronger economic regions in the U.S.," he writes. "The company's stock price is falling in line with its industry, but BB&T is another bank with no exposure to any degree in any of the segments of the industry that are troubled."

Still, one of Bove's top picks is PNC.

The Pittsburgh-based bank "has avoided most of the pitfalls in the banking industry," he writes in the note. "It is not in the subprime, hung bridge loans, credit derivatives to any degree, or off-balance sheet entities....

The earnings outlook is better for this company than most of its industry."

As for Citi, Bove disagrees with concerns expressed by other analysts about the bank's capital position, with some suggesting that the bank may have to cut its dividend or sell assets in order to raise its capital levels.

"It is recognized that the company is prone to sizable writeoffs in the fourth and first quarters," Bove writes in the separate note. "However, the dividend in my view is well protected. The yield at 7% is compelling. The franchise value of this company may be the highest of any bank in the world, and an active effort is underway to improve operations, nd it will be successful."

"In order to achieve the targeted

capital goals, the bank is shrinking its asset base by selling mortgage-backed securities," Bove writes. "It is also raising equity by divesting itself of non-essential divisions. ... Citigroup has numerous other tools it can use to positively impact these ratios, including a dividend reinvestment plan.

"Additionally, the bank is not waiting for a new CEO to move aggressively to further cut costs," he writes. "Finally, the numerous programs put in place by the prior CEO are likely to offer revenue benefits. They should start adding to earnings."