Dick Bove thinks investors are neglecting something critical when it comes to bank stocks.
Bove, the veteran financial sector analyst and vice president for equity research at Rafferty Capital Markets, said in a recent interview that loan losses are creeping up faster than some may think, which could be a risk for the banks going forward.
"We're seeing an increase in loan losses on credit cards, a big increase in loan losses on auto loans, we're seeing losses creep up on student loans, we're seeing it happen with commercial real estate in two places — on shopping center loans and on construction loans. So when people take a look at the loan losses this quarter, they might be a little bit surprised," Bove commented Wednesday on CNBC's "Trading Nation."
Of course, rising loan losses adversely affect banks, as they must then set aside capital to cover those losses when, for example, a customer defaults on a loan. At the same time, an accounting rule that raises the loan loss reserves that a bank must hold (known as current expected credit loss, or CECL) could chip away at $40 billion in pre-tax income in the banking industry, Bove said.
What's more, the losses are a bad sign for the economy as a whole — as confirmed by the drop in loan volume that Bove is also noticing.
"We're seeing absolute declines, in some cases, in commercial and industrial lending. We're seeing a massive slowdown in auto lending. The only area of lending which is really hot and doing well is credit cards," he said.
On the other hand, loan problems are not of particular concern to Jeffery Harte, equity research analyst at Sandler O'Neill.
"Credit quality is actually holding up pretty well out there. So credit loss is always something we worry about, but I'm not particularly worried about it at this point," he said in a phone interview with CNBC on Thursday.
Still, Harte acknowledged that the state of the car market could give some pause when it comes to auto loans.
"The things people have been seeing and are concerned about is that used car pricing is declining and inventory levels rising. So there's concern out there that the demand for used cars and for cars in general is declining," he said.
The SPDR S&P Bank exchange-traded fund (KBE), which rose 26 percent in the month following the U.S. election in November, has dwindled and lost a little over 2 percent year to date. And the KRE, an ETF that tracks regional banks, rose 27 percent in the month following the election though has fallen 3 percent so far this year. The KRE on Wednesday logged its worst day in over two weeks on the back of Federal Reserve meeting minutes published.
"If you think about it as a business which has to maintain certain accounting standards, well they're not maintaining those accounting standards. But the market says, we don't care about any of that. All we care about is, 'Gee whiz, interest rates are going to go up,' or 'Gee whiz, interest rates are not going to go up,'" Bove said, adding: "It's ridiculous."