The major issue for banks this quarter is that core earnings are going down for the industry and that’s what investors will be looking at, said Richard Bove, financial strategist at Rochdale Securities.
“What you’ll see is a lot of gimmickry and a major effort to lower compensation cost to offset the fact that revenues just are not going to be there,” Bove said in a live interview on CNBC.
Trading activity and investment banking among big financials such as JPMorgan , Bank of America , Goldman Sachs and Morgan Stanley have been “extremely weak” during the quarter, explained Bove.
JPMorgan kicks off earnings seasonon Wednesday morning for the big banks this week.
“Therefore, what [banks] are going to do is cut your compensation cost very dramatically in order to hold up earnings in some fashion,” he said. “The time has come for [banks] to start whacking away at the number of branches…as they try to drag their costs down.”
Part of the reason why the industry is cutting costs is due to the new Dodd-Frank bill and government laws, he said.
“They’ve made it unpalatable for banks to make loans—they incentive banks to lend money to the government and disincentive banks to lend money to the private sector,” Bove said. “So if you lend money to the private sector, you have a very high-risk weighting and so as a bank, you’re shifting money form the private sector to the government in order to hit these capital ratios.”
Meanwhile, Bove’s stock picks include Citigroup , USBancorp , Goldman Sachs and Lazard .
“The issue right now is the cost of owning a bank stock is below the liquidation of these companies and therefore, that’s going to set off a wave of acquisitions and that will begin by the end of this year,” he said.
Scorecard—What He Said:
- Bove's Previous Appearance on CNBC (Aug. 31, 2010)
More Market Intelligence:
- Foreclosure Mess Is No Reason to Dislike Banks: Strategist
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- Banks vs. Telecoms—The Better Buy: Stock Pickers
CNBC Data Pages:
No immediate information was available for Bove or his firm.