Banking sector investors, analysts and managements are taking their eye off the ball by focusing on "accounting tricks" and capital returns to shareholders instead of sales growth and margin expansion, according to outspoken bank stock analyst Dick Bove of Rafferty Capital Markets.
By contrast, Bove says JPMorgan Chase ( JPM) and Citigroup ( C) management appeared to show little interest in discussing how they were improving their businesses, when they spoke on Tuesday. "They're interested in ROTCE and they're interested in the difference between ROTCE and ROA and ROE and what are you going to do about deferred tax assets--DTAs. This is not running a business. This is playing accounting games. Stocks don't go up because people can play accounting games. They go up because the company sells more widgets at higher prices, and there was none of that in the JPMorgan thing. There was virtually none of that in the Citigroup thing. Nobody seems to see this industry as one which has potential to grow because it has attractive products that are going to be sold at increasing rates over long periods of time, which by the way it is. Money is not going to go out of style." Despite his unhappiness with JPMorgan and Citigroup's presentations Tuesday, Bove continues to recommend both stocks. He argues Citigroup is cheap in terms of valuation, even though he is "not impressed by the business plan at this moment." He also sees JPMorgan growing due to competitive advantages, though he believes management needs to do a better job of shifting questions "from accounting discussions to more important aspects of the business." Another company that impressed Bove on Tuesday was SunTrust ( STI). "The big argument against owning bank stocks is that assets and capital are overstated, but what SunTrust showed is everything is actually understated. Every time SunTrust sells a distressed asset it sells it at a profit," he said. -- Written by Dan Freed in New York. Follow @dan_freed