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Dick Bove: The market doesn’t understand Wall Street banks

It’s not all about the Fed: Wall Street has a lot more going for it than just interest rates.

Top banking stocks have traded in close alignment with the market's expectations for an interest rate hike from the U.S. Federal Reserve — but one big-name analyst says that should end soon.

Dick Bove
Jin Lee | Bloomberg | Getty Images
Dick Bove

Wall Street banks edged higher Friday, but that was after the major financial institutions had their worst day in two months on Thursday, as markets priced out the possibility of a September hike. The tepid jobs number of 151,000 steered the odds of a September rate hike significantly lower.

"The misrepresentation of the industry is really beyond belief," said Dick Bove, vice president of equity research at Rafferty Capital, before the August jobs report was released.

The market is too fixated on how a Fed hike, or the absence of one, will impact Wall Street's top banks, Bove said. Looking at other macro factors, he sees an optimistic outlook for financial services stocks.

Yes, the jobs report was a disappointment, but unemployment remains low at 4.9 percent. However, more bank loans translates into greater revenues, and that's exactly what banks are doing.

At Bank of America, JPMorgan Chase and Wells Fargo (three of the four biggest consumer banks in the United States), average loan volume rose in the most recent quarter — in some cases, substantially. Average loans are a broader metric of how much banks are lending — and the rise in average loans signals banks could soon be making more off that lending.

"Loan volume is what drives bank earnings, and volume will be up if there's no recession," Bove said. Further, he added, credits like energy, which plunged in value to begin 2016, have recovered. "Bad loans are below the normal level."

None of that is to say big banks aren't eager to see the Federal Open Market Committee continue its extremely gradual process of rate hikes. S&P Global Market Intelligence lifted its price target on Bank of America shares by $2, saying the next rate hike and every subsequent one would be worth $120 million in revenue to the bank.

"We expect the largest U.S. banks, including [Bank of America] to immediately benefit from any rise in short-term interest rates," said Erik Oja, equity analyst at S&P Global Market Intelligence.