Dick Bove: Lack of vision is punishing US bank stock valuations

Key Points
  • Bank valuations are suffering from continued regulatory uncertainty, says a banking analyst
  • The opacity discourages banks from deploying their vast capital balances for productive uses
Dick Bove on which stocks to buy following stress tests

Valuations of U.S. bank stocks are being hit by the ongoing uncertainty surrounding their industry which has been the focus of concerted regulatory attention in recent years, according to a banking analyst at Rafferty Capital Markets.

Given President Trump's pledge to prioritize the rolling back of many of the stricter oversight initiatives introduced in recent years, the regulatory gyrations are only expected to continue.

This means that banks such as Citi are likely to keep sitting on their whopping capital piles in a continuing state of paralysis, Dick Bove told CNBC's Street Signs on Friday.

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"They have no vision, they have no future outlook which says 'this is what's going to be happening in this industry five years from now, this is how much capital we're going to have, this is how we're going to deploy it to grow our earnings'" claimed Bove, pointing to the robust capital positions reflected across the board in the Fed's latest round of stress tests carried out on 34 U.S. banks as evidence of the capital stockpiling underway.

"What it (the stress test) shows is that the American banks are not having any difficulties at the moment. It indicates that they can generate staggering amounts of capital over relatively short periods," he continued, before turning to the detrimental impact the opacity has on the sector's relative stock market performance.

"What you have is kind of a mess in terms of trying to figure out what these companies are, what they're doing, where they're going - and that keeps the multiples on these stocks relatively low," he added.

Michael Nagle | Bloomberg | Getty Images

The industry has been pushing hard for the repeal of the so-called Volcker rule which seeks to discourage risk-taking by preventing banks from getting involved in certain types of speculative investment activities using their own funds. In practice, this has limited the banks' ability to own hedge funds and certain private equity type vehicles and to trade using proprietary funds (prop trading).

Yet year after year of record operating results posted within the industry since 2014 demonstrate that the rule can hardly be accused of hamstringing banks' earnings potential, according to Bove. He insists that calls for bill's repeal are actually due to the heavy burden placed by the bureaucratic process necessary for meeting the regulatory obligations which tie up thousands of staff given banks are forced to report to five separate agencies.

"The argument is take one agency, take a limited set of data that you're looking for and evaluate Volker on that basis," Bove explained.

"A lot of the stuff which is being proposed here is not so much because it's going to create this tremendous increase in bank earnings but it's going to reduce tremendously the cost of running a bank."

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