Dick Bove Talks Banks - Zing Talk (BAC, C, JPM)

Dick Bove is Senior Vice President of equities research at Rochdale Securities. He is a frequent commentator on CNBC and other financial news networks.

Subscribe in iTunes.

Dick was nice enough to grant Benzinga's Alex Schiff an interview. They discussed the state of the economy and the banking industry.

Could you start off by telling us a little about what you do at Rochdale Securities?

I do two things. First I monitor financial flow through the economy by looking at the Federal Reserve and the different aspects of the banking industry from say a 30,000 foot view. And of course I follow a number of stocks in banking and in the brokerage sector.

You're a frequent guest on business channels like CNBC. How did you get to become one of their go-to guests?

I've been at this for over forty years. It just kind of evolved over time from one call a year to one call a month and eventually to one a week; It just kinds of snowballed. They basically started calling and I just answered their questions.

A few years ago BankAtlantic Bancorp Inc. sued you and your firm for defamation after you included them in a list of possible bank failures. Now this may or may not be something that you can talk about due to the legal issues, but do you have any comment on the ordeal?

The word ordeal is exactly correct. The lawsuit lasted two years and the legal cost to me was $750,000. In the end the lawsuit was withdrawn with nothing being done on my end. It was a farce within and farce and they eventually just walked away. Essentially, I am an analyst who is paid by my clients to provide opinions on the banking industry. To be sued for doing what my job requires me to do was quite a shock.

How has that episode changed, if at all, the way you look at your job as an analyst?

While the suit was underway it inhibited my ability to do many things as an analyst. I was informed by my legal team to avoid saying or writing certain things because they may be viewed as malicious by BankAtlantic whether it was about them or not. I had to limit what I was saying until the suit was resolved. Now that it's over, after almost two full years, I have a greater degree of freedom to say what I like.

Fast-forwarding back to today's market, where do you think the banks are headed?

The banks are in trouble because people don't want to buy their stocks. This is happening for two reasons. The first one is that even though earnings were up 9% in the second quarter, more than 100% of the gain in earnings was due to the fact that banks reduced an accounting reserve as opposed to having core earnings grow. Essentially the companies' earning assets declined, their margins dropped, interest and non-interest income were down and their interest expenses were flat. This forced holders to make a decision and they seem to want to see the core earnings grow.

Secondly, it appears the U.S. government has a vendetta against the banking industry. Whether it be the president, congress, or any other governmental body, the view is that the reason for the 2008 financial crisis is due to fraudulent banking. Because if that view, all of those entities are trying to harm the banking system; make it shrink, stop it from going, etc. It's sad because the banks did not create the financial crisis.

It was created because in the previous five year period debt grew three times faster than income. In the U.S. we like to borrow money to buy products that are made in other countries. This created huge pools of money in some foreign countries; obviously China, India, etc., and that money was not invested widely. We are not attacking the problem; we are going after a result of the problem.

Now that the reserves are running low, it seems like the banks will be in really deep trouble if there's another shock to the market. What do you think about that?

There is no deep trouble in the banking industry. I know people love to say that and are actually infatuated with the idea, but it is not. If you take a look at the common equity of the bank, plus their reserves, and divide that by their assets, you can not find a year since 1935 in which the industry was better capitalized than it is today. It's fair to assume that the industry may be over capitalized.

The other thing you can look at is their liquidity. Citi Group is sitting with $180 billion in cash. One out of every 11 dollars of their assets is simply cash. Bank of America BAC has $175 Billion is cash, JP Morgan JPM has $85 Billion in cash. The banking system in the U.S. is not at any risk; it is not in any danger. However, there is no perception by any constituent group that this statement is correct. The belief is that the banks are in a great deal of financial difficulty and that is why the stocks act the way they do.

One stock I always hear conflicting sentiments about is Citigroup C. On the one hand you've got this stock that not too long ago was hovering around $50 per share and is now trading at only 3.85 as of yesterday's close. It's an attractive growth stock, even if it only picks up a tiny percentage of its former valuation. But it does still have this label as an extremely risky stock. What are your thoughts?

They were bankrupt is September of 2008. As a result Citi Group lost its independence, was ripped apart, and had to be totally restructured as a company. Now all of that has happened and the company is probably the best capitalized of all the major U.S. banks. It is now split into different groups; one is Citi Corp. which has earning power of $.70 a share and is Citi Holdings which is a group of companies which Citi Corp. is trying to sell. When these things are sold then Citi Holdings will be gone and you'll be left with a company with one of the best credit card businesses in the world, the best Fortune 500 financing business, and one of the best payment servicing systems internationally. I think the stock is very cheap and ultimately in 9 moths to a year, when Citi Holdings is gone, the stock should at least double.

How do you feel about Bank of America?

Bank of America is a bit different because it's a company that the government is trying shrink, and in this process Bank of America is being forced to get rid of some good investments. The desire on the part of the government is to get Bank of America very over capitalized like Citi Group. The bottom line is that Bank of America is the best banking franchise in the world. They have the greatest number of customers on both the personal and business side. If you believe that the U.S. economy is going to grow then it would be almost impossible for Bank of America to not grow with it. If you believe we are going to enter a second recession then the converse is also true. Bank of America is so big that it will do whatever the U.S. economy does. At the moment it is priced below what a normal level of earning would suggest so this stock should also have pretty solid long term growth potential.

Where do you see the broad spectrum of the U.S. economy heading?

It depends how you want to look at it. There are more people working every day. Secondly, those people are seeing improvements in their real income and third their debt levels have dropped seven of the last eight quarters. You have more people making more money, which are presumably more willing to spend money and help the economy. Capital spending is up, inventory building is up; all of this suggests that the economy is going to move ahead.

On the other hand, you have this enormous amount of fear. The government is so negative towards the private sector that corporations and even households are afraid to invest or spend. If you're sitting as a company worrying about financial costs due to these new rules and law changes then you hold back and don't make hiring and expansion commitments that you normally would. This prevents the economy from growing. If the psychology would only swing more positively, you would see the economy grow over the next few years. If the psychology continues to get more negative then you'll definitely see another recession. The odds that I'm putting on it are 40:60; 40% chance that we go into a recession, 60% chance we do not.

in light of all this, where do you see the banking industry in 10 n years?

The industry will be the same 10 years from now as it is today. Most of the recent provisions and changes will be repealed because they are so poorly thought out and will harm the American consumer.

Now this is something I wanted to ask you as someone who's also put their ideas and projections out there and faced the inevitable criticism that comes with that. How do you deal with people who say that you're crazy for some of the calls you've made?

An analyst is going to be wrong a lot. In 2005 I wrote a piece entitled This Powder Keg is going to Blow which turned out to be an accurate representation of what was going to happen to the housing industry, but for a year and a half it was wrong because the industry continued to grow. Then In March, I thought the financial crisis was over. I was wrong. It continued to deepen well into September and October of 2008.

You try to present opinions based on your view of the economy and the theories and concepts that you've developed to analyze what's going on and hopefully you're right more than you're wrong. And presumably, if you've been doing it for 45 years you've been right a lot more than you've been wrong.

Okay, now that we've got the harder questions out of the way we have a few fun ones we ask all our guests. What was your first, and what was your worst job?

My first job was picking up paper on Carson Beach in south Boston. As part of that job I got to throw sand over a hill for a day. The worst job was being a retail salesman. You had to make a hundred phone calls a day in hopes that you'd have five new customers at the end of the week. At the end of the year you'd build a book of about 250 customers but it was grueling calling person after person, many of whom had no desire to listen to you or hear you.

What is your favorite restaurant you've ever been to?

That's a tough one because there are a lot of magnificent restaurants out there. I don't even think I can name one. I'm talking to you from Tampa which is where I live and work and there's a restaurant down here called Pagelli's which I've been going to a lot. Across the street from there is a Mexican restaurant which I like quite a bit too.

What do you like to do outside of work? Any hobbies?

I've got seven kids and 14 grandchildren and that's my hobby. I tend to spend a lot of time with family.

Tell us something about Dick Bove that no one's asked you about in an interview.

There's a lot of things I can talk about. Most importantly in my life now is that I'm 69 years old and I weigh too much and I have to lose some weight. People may notice that but they never ask me about it.

And this last one is Benzinga's trademark question: What was the best, and what was the worst investment decision that you've ever made?

I would rate the housing boom in 1972; I was the first to indicate when it was going to end, and the call in 2005 that the most recent housing boom was going to end among the best. The call that after the bailouts the financial crisis was over was certainly a terrible call, and I also made a bad call when the war broke out in Bosnia to get rid of everything I owned because I figured that war was going to make everything worse.