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Bank Earnings: Beware of ‘Dramatic Difference’ This Quarter, Warns Bove

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It's been said that before you agree to do or buy something, you need to read the fine print first. Danger often lurks in the details.

As we approach the start of third quarter earnings season, with JPMorgan (JPM) and Wells Fargo (WFC) both set to report this Friday morning, a similar stance of cautious skepticism may save investors a bundle, especially when it comes to the banks.

"I think (analysts) may be disappointed," says veteran financial sector analyst Dick Bove of Rafferty Capital Markets in the attached video. "This quarter (bank earnings) could be down on a year-over-year basis for the first time in four years, so there is a dramatic difference and people should be aware of it."

But there's a catch.

On paper, Financial Sector (XLF) profits are pegged to grow 9% this quarter, FactSet data shows, outpacing all nine other sectors and about triple what's expected of the full S&P 500 earnings. But Bove says when you look more closely at the elements that drive the earnings of the banking system, they don't look "particularly positive at the current time."

He says "it's no secret" there's been a slow down in commercial, industrial and mortgage lending, trading has been bad, and investment banking not so good, so margins will be under serious pressure.

But despite it all, he thinks banks will still ''eke out" increased profits by reducing the amount of money they set aside for losses and litigation, while warning that "the fundamental drivers that you would like to see are not going to be there this quarter."

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