Buy big banks and avoid the regionals. That's the view from top bank analyst Dick Bove, who says that’s effectively the takeaway from the bank earnings released so far this week.
Bove, equity research analyst at Rafferty Capital Markets, said the current low rate environment creates a kind of dichotomy - what he calls things that are working and things that are not working.
“What’s working is commercial lending, trading and investment banking,” he said, highlighting Goldman Sachs (GS), Citigroup (C), and JPMorgan (JPM) as examples of big banks who are benefit from those themes.
Bove also noted that valuations are extremely low in this group. “Citigroup sells at a 25% discount to book; Bank of America sells at a 31% discount to book. There is simply no reason for that.”
All told, Bove called Goldman, Citi and JPMorgan, “underperforming stocks which are showing good earnings, yet selling at big discounts to book value. That’s a good reason to buy.”
Conversely, Bove suggests avoiding regionals.
“Anything related to residential mortgages or home equity loans has not been working,” he said, and the regional banks rely on both.
Also, Bove doesn’t believe interest rates will rise until 2016. “The Fed can’t raise rates with the dollar this strong,” he said.
Bove believes if rates were to increase now, the dollar would get even stronger. In turn, U.S. goods would become that much more expensive for buyers overseas; profits at multinationals would then decline sharply, potentially putting more stress on an already fragile recovery.
“Until rates rise or the economy gets stronger, regional bank earnings will likely remain disappointing,” he said.
Therefore, for the remainder of 2015, Bove thinks investors should separate banks into two groups. “There are those that do the things that work well and those that don’t work well at all. There’s a clear divergence between the two.”
*Editor's Note: It should be noted that Bove is often bullish on banks.
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