Instead of being hurt by the European debt crisis, US banks could actually end up benefitting from the turmoil across the Atlantic, analyst Dick Bove said.
Columns and steps
Responding to a Fitch Ratings report on Wednesday that said US banks could take a big hit if euro zone nations defaulton their sovereign debt, Bove said there are two reasons investors shouldn't worry:
1) US banks have a relatively low level of exposure to European banks.
2) The problems facing European banks could actually drive business to healthier institutions in the US.
"There may be questions as to whether the European banks are going to survive or not," Bove, vice president of equity research at Rochdale Securities, said in a note to clients. "There can be no question as to who benefits if these banks are stressed."
On the exposure issue, Bove cited Fifth Third Bancorp . The bank has less than $500 million in sovereign exposure in a loan portfolio totaling $79.2 billion. Yet its stock price, like most of the other big US banks, gets hammered every time bad news comes out of Europe.
That's not fair, Bove said.
"This stock goes down whenever there is a European eruption, but the company is not a European bank," he wrote. "It is an American bank in what appears to be a slowly growing American economy. Its market prices should be evaluated on its American experience, which is not at all bad."
In its warning, Fitch acknowledged that U.S. banks are reducing exposure to European debt , but contends that a disorderly unwinding — specifically, a continued spreading of the crisis — would cause financials to be "greatly affected."
"Fitch believes that, unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken. Currently, Fitch’s rating outlook for the U.S. banking industry is stable, reflecting improved fundamentals at most banks, coupled with generally lower ratings versus pre-crisis levels," the agency said in its report. "The risks of a negative shock are rising and could alter Fitch’s stable rating outlook for U.S. banks."
Banks plunged Wednesday afternoon on the news, taking the major averages down with them. Fitch added to its dour outlook Thursday, saying Italy was already in a recession that would make fiscal reform more difficult. Banks seesawed in Thursday trading, dipping lower about 15 minutes after the close of the European markets.
The principal worry is that while the eurozone bailout mechanism — the European Financial Stability Fund — might be able to cover the debts of a tiny country like Greece, it would be well short of dealing with defaults in Italy, France, Spain and the other large nations struggling with debt loads.
On paper, the exposure to American financial institutions appears manageable. But the uncertainty surrounding counterparty risks — primarily whether those on the other side of credit default swap arrangements — would be able to pay off on the insurance bets is what drives concerns over U.S. banks that say they are properly hedged.
But the perpetual threat from Europe shouldn't trouble U.S. investors, Bove argued. He cited PNC Financial as another example of a company whose shares are unfairly depressed, and predicted that "it will make money from this debacle."
Bove compared the situation to what would happen to American automakers if a Japanese company like Toyota got into trouble, or how Google would benefit should Facebook falter.
"The ways in which these benefits accrue are numerous," he wrote. "Holders of funds in European banks shift them to safer regimes. American banks are getting some of this money. European banks need to shrink and recapitalize. They are selling loans and assets at reduced prices. American banks can obtain good loans on American companies by buying these credits."
Bove often has bemoaned the damage done to banks through increased regulations and capital requirements.
He does not include threats from Europe, though, on his list of things that should concern bank investors.
"If my frustration is too evident in these comments then I apologize," he told clients. "However, every day I see less reason why regional American banks should decline in price due to some European expected disaster that will not affect the American bank."
