This has been a great year for bank stocks. But now one of the world's leading banking analysts has turned bearish. As a slew of banks report their earnings this week, is there one that may stand out from the rest?
Since the start of 2013, bank stocks are up nearly 21% as measured by the Financial Select Sector SPDR ETF (the XLF). Compare that to the S&P 500's 18% or the Dow's 14%.
(Read: Analysis: US banks get ready for the day when deposits shrink)
Friday will see earnings reports from the likes of JP Morgan Chase and Wells Fargo. So, what does Dick Bove, vice president of equity research at Rafferty Capital, think is in store for banks?
Bove says he's bearish and he gives three specific reasons why:
1. Limited asset growth
Higher reserve requirements by the government mean banks can't use that money to increase assets. "The government has consistently increased the capital requirements of the banking system," says Bove. "As the government increases the capital requirements, the banks stop growing their assets. In many cases, they actually shrink their assets. So, if the banks are not growing their assets, it's very difficult for them to grow their earnings."
2. Slowing loan growth
One of the biggest assets banks have are loans. Various economic factors are making for diminished loans but, with increased reserve requirements, banks aren't able to lend money as much as they used to. "Before the crisis in 2008, banks would put 80 cents of every $100 in deposits that they would get from customers at the Fed," says Bove. "Today, they're putting $26 of every $100 they get from customers at the Fed… When you do that, you severely restrict the ability of the banks to lend the deposits that come in and that slows loan growth dramatically."
3. Slowing capital markets
With new regulations such as Dodd Frank, banks have gotten out of the proprietary trading business. Of course, they still having trading desks. However, those desks are not seeing the kind of business they had in the past, according to Bove. He says the drop in business is across the board in markets like fixed income, currencies, commodities, and equities.
(Slide show: Debt ceiling flashback: The biggest decliners)
Yet Bove doesn't believe all banks will suffer the same way. In fact, he there's at least one bank Bove believes is still a buy because it's cheap relative to its book value.
To see hear more of the reasons why Bove is bearish on banks and to see which bank Bove thinks will stand above the rest, watch the video above.
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