Dick Bove, the high-profile vice president of equity research at Rafferty Capital Markets, has reversed a strongly bullish call he made when joining the firm two years ago. In late January 2013, Bove predicted that banks were just taking off on a 14-year bull run propelled by stellar earnings and rock-solid balance sheets.
Now he sees an industry that has become the victim of a "de facto nationalization" by the government and its Fed regulatory arm, destined for weak performance unless conditions change. Bove believes the government is so intent on keeping banks out of taking significant risks that it is willing to hamstring the industry and relegate it to little more than buying bonds to underwrite government debt.
"The problem is trying to make money," he said in a phone interview. "If the government is convinced that it's going to control the balance sheets of the industry and is going to control it in a fashion that doesn't allow it to make money, it's going to have a negative effect on the stocks."
At least on paper, banks have been making money in record numbers, and share prices have been rising.
However, the sector has underperformed the stock market for the past five years. During the period, the S&P 500 gained more than 79 percent while the KBW Bank Index has risen 59 percent.
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In 2015, the S&P bank stocks have fallen about 5.4 percent, while the financial sector as a whole is off 2.44 percent. Consumer finance is the worst subsector in the group, falling 7.6 percent, according to FactSet.
Bank earnings were a bit of a disappointment for the fourth quarter, with just 45 percent beating estimates, compared with about 72 percent for the S&P 500.
Still, Bove makes room for outperformance within the sector, but said four companies look particularly strong: SunTrust, Bank of America, Morgan Stanley and BNY Mellon. (Disclosure: Neither Bove nor Rafferty has an ownership stake in any of the banks.)
More broadly, he said the industry has been able to show balance sheet profits through accounting gimmicks and the use of outsized reserves banks were required to accumulate after the financial crisis.
"Get rid of all the impact of stuck buybacks. Did companies show increases in earnings or not in the seven-year period?" since the crisis, he said. "The answer is clear as clear can be: They did not. Seven years, and no increase in earnings."