NEW YORK (

TheStreet

) -- Rochdale Securities Analyst Dick Bove has an explanation for why bank analysts, including himself, have been so wrong with their buy recommendations in 2011.

"I failed to understand that the fears in the market concerning banking were so great that the fundamental improvements in the economy, the industry, and companies like

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

would simply be ignored," Bove wrote in a report.

According to Bove, analysts have been betting that the improving fundamentals of the economy and the banking industry will help bank stocks. Yet the market has refused to pay heed to the fact that banks have seen an improvement in capital and liquidity levels, are reporting fewer bad loans and are beginning to see a lift in revenues.

Instead, the overwhelming macro factors have led to a steady rise in the risk premium demanded for bank stocks.

In other words, it appears that bank stocks have seen a de-rating in valuations, as investors are unwilling to reward banks for better earnings performance amid a cloudy macro-economic outlook.

"The key to making money in these companies may not lie in what their fundamentals show but rather what happens to the risk premium on these issues," Bove wrote. "The macro factor will continue to be more important than the micro factors. On periods like this analysts, like me, who rely on traditional parameters like company results and historic relationships between interest rates and earnings yields, are going to have a tough time."

The analyst was responding to a

Bloomberg

study of recommendations by 2,900 analysts across 200 firms. Bloomberg found that analyst's selections were "no better than a coin flip", according to Bove's report.

Bove has been consistently issuing buy calls on

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

which have tanked 61% and 50% respectively year-to-date.

He is not alone in his bullishness. Despite Bank of America's innumerable imponderables, there is only one analyst with an underperform rating on the stock. About 14 analysts, Bove included, have a buy rating on the stock, while 17 analysts prefer to stay on the fence.

When it comes to Citigroup, 18 analysts have a buy or outperform, 5 analysts have a hold rating and 3 analysts have an underperform or sell rating.

It is not that analysts have not considered the weak economic outlook in their forecasts. In fact, bank analysts have been steadily downgrading bank earnings estimates to reflect weaker trading revenues and thinning net interest margins.

However, most have held that current valuations more than capture the downside, with many stocks trading well below their tangible book value per share. Skeptics, however, say the market is correctly surmising that bank's assets cannot be trusted and more writedowns/capital issuance might be in store.

Bove still sticks to his belief that the fundamentals are intact and the market's fears about macro risks will dissipate.

" Looking forward I am still saddled with the belief that the fundamentals will continue their improvement and that risk premiums are likely to contract. If this is true 2012 will be somewhat better than 2011," he wrote.

--Written by Shanthi Bharatwaj in New York

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