Financial regulatory reforms likely will pressure bank stocks down another 10 to 12 percent, but the damage will only be temporary until the industry adjusts, analyst Dick Bove said Thursday.
In fact, Bove, of Rochdale Securities, said bank stocks are likely to explode as companies adjust their business models to the new environment.
"They may fall another 10% to 12% reflecting market fears but they are still very attractive investments," Bove wrote in a note to clients. "Longer term, I still expect that these stocks will grow in multiples, not percentages."
Banks could employ a number of strategies to combat the new regulations, including cutting costs; eliminating free products and stop forgiving fees; employing new charges such as monthly maintenance fees for accounts; entering new arenas such as payday loans to develop new products; and broadening their capital markets outside US borders to where regulation is less stringent.
Projecting out to 2015, Bove said bank pretax earnings could skyrocket 771 percent while investors will see strong dividend increases.
"Even with lower earnings capacity, banking companies are likely to experience a sharp pretax earnings recovery over the next few years," he wrote. "Moreover, once the financial bill is passed there is likely to be a meaningful relief rally. The stocks appear to be undervalued, once again creating a new buying opportunity."
The relative strength has been a hot topic among analysts lately as the industry awaits the final product of the congressional financial regulation bill.
Analyst Meredith Whitney recently said in a CNBC interview that she would not touch bank stocks because of the regulatory pressures.
Banks in the Standard & Poor's 500 were up 3.75 percent year to date heading into Thursday's washout, during which financials lost about 3 percent in the morning trading.