Von Aldo

A New "Golden Age" In Banking?

You've got to love Dick Bove, the outspoken financial services analyst with Rochdale Research. We featured him back in December 2007, after Bove had defended former Merrill Lynch CEO Stan O'Neal in spite of Merrill's disastrous earnings in Q3 of 2007. [Breifly, Bove argued that O'Neal was scapegoated. This from our December 2007 issue: “Pin the Tail on O'Neal, blame him for all of the company's current problems and kick him out,” Bove wrote derisively in an October research report (titled, Merrill Lynch Makes Another Bad Decision — Part 3). Bove believes Merrill is a better firm because of O'Neal's strategies," we quoted Bove as saying. Oops!]

Say this for Bove, he ain't afraid to speak his mind and offer bold, contrary opinions. On May 31, he offered a 60-slide research report titled, Loan Problems Obscure the Creation of a New Age in Banking." That is to say, he thinks banks, particularly big ones, will flourish "when the economy turns." I'll quote more of the report since it is not available online at the Rochdale Research site: "Banks are ready to take advantage of the recovery" because they are getting healthy. He says:

1.) The industry's balance sheet is stronger than ever;

2.) Revenue growth has reappeared;

3.) Costs are under control;

4.) Cash earnings (pretax income plus loan loss provision plus amortization) are at an all-time record; and,

5.) Loan losses will plummet in a recovering economy.

Yes, banking is a cyclical industry, and there will likely be more pain in loan losses in the second and third quarters --- banks are still cleaning their balance sheets. So, near-term earnings will be depressed. But long term, large banks, on average, are building excess liquidity (cash-like instruments as a percentage of assets are approaching 1980s levels), are carrying "too high" loan loss reserves (as a percentage of loans, the industry is approaching late 1980s, early 1990s levels) and "capital levels are too high" (does not include recent capital raises), Bove argues.

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