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Low interest rates and concerns about future litigation are no reason to turn a blind eye to bank stocks, Rafferty Capital's Dick Bove said Tuesday.
"There's tremendous amount of value in these stocks which is simply not being recognized by the market," Rafferty's vice president of equity research said on CNBC's "Squawk Box."
Banks have had a tougher time making money on deposit-based business because the Federal Reserve has kept interest rates near zero since December 2008.
However, research by Rafferty Capital showed there is no correlation between interest rates and bank stock prices, Bove said: "It was almost impossible to see that there was a linkup between interest rates and what happened to bank stocks."
As for litigation arising from the housing and financial crises, the outlook has turned "somewhat positive," Bove said, citing a report by the Financial Times that the top 16 banks were charged about $300 billion in fines, for which Bank of America accounts for one-third.
"The fines will still be there in the next five years, but they're not going to be anywhere near what they were in the past five years," he said.
Responding to reports that delinquencies on home loans are on the rise, Bove said overall loan losses are below normal.
"To assume that they're going to go up from this point is a pretty reasonable estimation," he said. "The key reason that you want to own the bank stocks is not because you're worried about where loan losses are going to go or whether they're going to stay where they are. It's because loans are going up."
Total loan volume has reached about $8.25 trillion, led by lending to companies and commerce, and it now appears the consumer will begin borrowing again, Bove said.
"Driven by an increase in loans, you're going to see earnings probably get back to $70 billion for the industry, and the stocks don't reflect it at all," he said. "You're going to see a rotation into bank stocks, if nothing else, but the bottom line is you're going to see a rotation into a group of stocks that are selling below their normal valuation and whose earnings are going to go up for at least the next two years."
Disclosure: Bove owns shares of JPMorgan, Bank of America and Citigroup. Rafferty Capital does not own greater than a 1 percent share in the stocks, and does not provide investment banking services to the institutions.