Longtime bank analyst Dick Bove has a bone to pick with CNBC correspondent Bob Pisani over one of Wall Street's hottest issues -- whether low interest rates are good or bad for U.S. lenders.
Bove, a 46-year veteran who now works at Rafferty Capital Markets, sent clients and reporters a note on July 1 titled, "An Open Letter to Bob Pisani," in which he picks apart the theory that low interest rates will devastate bank profits. According to Bove, Pisani posits that lending margins will be drastically squeezed as the Federal Reserve delays rate increases.
Far more important, Bove argues, is that lower rates will stimulate loan growth and prompt many homeowners to refinance mortgages, resulting in a shower of fees for underwriters. Lower rates also should fuel gains on banks' $1.95 trillion of bonds and other fixed-income securities, Bove wrote. It's simple bond math, after all, that falling yields mean higher prices.
"The value of those securities continue to go up, minute-by-minute," Bove said in a telephone interview.
The back-and-forth comes as Britain's vote to exit the European Union prompts economists to dial back estimates of global growth, while many traders now dismiss the likelihood of further rate hikes this year by the Fed. Yields on 10-year U.S. Treasury notes tumbled to a record low of 1.37% last week, down from 1.74% the day before the so-called Brexit vote.
Bank executives are likely to handicap the impact of lower-for-longer rates as they host conference calls this week to present second-quarter results. JPMorgan Chase (JPM) is scheduled to report on Thursday, with Citigroup (C) and Wells Fargo (WFC) to follow the next day.
Credit Suisse analyst Susan Roth Katzke told clients in a note yesterday that she's expecting "an active discussion around the cost of this new environment," in which 10-year Treasury yields trade below 1.5%. Last week, she slashed her estimates for Wells Fargo's earnings in 2017 and 2018, citing lower interest rates. She also reduced her estimates for Bank of America, which reports next week.
In the second quarter, large U.S. banks probably saw earnings fall 6% from a year earlier, largely driven by a drought in fees from initial public offerings, according to Credit Suisse. That's despite a slight uptick in trading revenue, which was rescued by a flurry of transactions in the week following the Brexit vote.
Few analysts dispute that mortgage refinancing will get a boost from the drop in long-term rates; KBW says some of that additional revenue probably started showing up in the second quarter, especially for big mortgage producers like Wells Fargo.
Going forward, will that be enough? Probably not, according to Brian Kleinhanzl, an analyst at KBW.
"There are some potential offsets, but in general we view lower-for-longer as negative," Kleinhanzl said.
Indeed, there's no shortage of observers who see the overall impact of lower-for-longer as negative for U.S. banks. Fitch Ratings said yesterday in a statement that lending margins are likely to compress this year, possibly pushing banks to plow more money into longer-term loans and maturities that are higher-yielding albeit riskier.
Which brings us back to Bove's broadside on Pisani.
Bove has been covering Wall Street since 1970 -- two decades before Pisani joined CNBC.
And rather than accept the conventional wisdom he says is driving bank stocks these days, Bove says he dove into Federal Deposit Insurance Corp. data to examine the history.
It turns out that U.S. commercial bank profits mostly rose during the post-Depression era, a period befitting the "lower-for-longer" descriptor, according to Bove.
Earnings also climbed in five of the seven years from 2008 through 2015, even as the Fed cut rates to near zero, held them there for most of the period and bought trillions of dollars of securities to loosen monetary policy further. Last year was a record for industry profits, Bove says.
What's more, he looked at bank earnings during a stretch from 1966 through 1982 when long-term Treasury rates often dipped below short-term rates -- an unusual phenomenon known as an "inverted yield curve." And, according to Bove, the firms' earnings increased in 15 of those 16 years.
Which is why Bove says he became so exasperated as he sat in his office in Lutz, Fla., recently, watching Pisani's broadcast.
"I have a very hard time when listening to or reading the comments on or in the media about banking," Bove wrote in a separate note to clients on July 6. "The reason is that I am unable to square most of the repeated comments to the real world."
CNBC spokesman Brian Steel didn't make Pisani available for an interview and didn't comment directly on Bove's points. He did provide a copy of a story that Pisani wrote for CNBC Pro in which the correspondent wrote that banks "may suffer from the lower-for-longer interest rate scenario."
Bove says Pisani sent him an e-mail afterward thanking him for his note, and Pisani included a line summarizing Bove's views in his piece for CNBC Pro.
For Bove, the proof lies in the pudding. Following annual exams last month, regulators allowed the largest banks to increase their planned dividends and share buybacks over the coming year to about 73% of total earnings, up from 53% now, based on Credit Suisse estimates.
"Unexplained is why, at least the banks I follow, can pay out all-time record amounts of cash to shareholders if the industry is in such terrible trouble, as described by the pundits," Bove wrote in the letter to Pisani.