Bank customers like you are victims of the turmoil hitting the industry, says veteran bank analyst Dick Bove, chief financial strategist at Odeon Capital Group.
On one hand, you’re likely getting paltry interest rates on your bank savings account. And on the other hand you’re likely paying higher rates on your mortgage and auto loan, as banks respond to the Federal Reserve's interest-rate hikes of the past 16 months.
Bove also expects more regional-bank failures, as higher interest rates make it more expensive for them to attract deposits, while devaluing their bond and loan holdings.
We recently spoke to Bove about these and other banking issues. Here are his comments.
TheStreet.com: What’s your general outlook for the banking industry?
Bove: The first point that needs to be made is that banks are consistently losing market share -- to money-market [securities], private equity funds, hedge funds, nonbank lenders and capital markets themselves.
Banks need higher yields on their bond/loan portfolios so they can maintain deposits and growth. But nonbanks don’t have to deal market rates all the time.
The banking industry is also in trouble from the rapid increase in interest rates over the last 16 months. That has caused depositors to leave banks because they are unable to offer market rates. Banks aren’t generating enough income from assets to offer depositors market rates, and they leave.
Higher interest rates also lower the actual value of bank assets. But banks report their finances in a way that overstates assets. They are in trouble from an operating standpoint.
Meanwhile, the Fed’s stress tests didn’t look at any of these issues. They were hypothetical BS. They created a mimic of a depression to do the tests. That had nothing to do with the banking system as it stands. It’s like going to Disney World and asking Tinker Bell about the banking industry.
TheStreet.com: What do you see coming out of banks’ second-quarter earnings reports?
Bove: Consumers are becoming tapped out with the end of stimulus programs. They’re borrowing heavily. Consumer banks like Ally Financial (ALLY) -) and Capital One Financial (COF) -) will likely have good increases in revenue. But many consumers now can’t repay their debt. So the size of loan losses will be shocking.
Commercial bank lenders, such as Fifth Third Bancorp (FITB) -) and Comerica (CMA) -), don’t have this problem. That’s because their loan rates move in line with benchmarks such as the three-month Treasury. So these lenders can be more nimble. But they have big margin issues, as they have to pay more for funding. Also, loan growth isn’t so great.
Then there are capital-market banks, such as JPMorgan Chase (JPM) -), Citigroup (C) -) and Morgan Stanley (MS) -). Equity offerings and mergers and acquisitions exploded in June, helping them.
Citigroup and Morgan Stanley should show earnings substantially higher than expectations. Citigroup isn’t in problem areas like fixed-rate loans, and they’re in high-yield bonds, which came back strong. Morgan Stanley apparently does a good job in fixed-income, M&A and equity offerings.
Who knows exactly what’s going on at JPMorgan? It can utilize so many accounting activities [techniques] that it can probably come up with good numbers. But it’s losing market share everywhere.
TheStreet.com: Are there likely to be more failures among regional banks?
Bove: Clearly yes, but not among the big regional banks. They are lending to corporations. I think there will be more failures among midsize regionals.
If the Fed increases interest rates a couple more times, which I think they should, PacWest Bancorp (PACW) -), Western Alliance Bancorp (WAL) -) and Bank of Hawaii (BOH) -) will have to pay more for deposits. The value of their loan and bond portfolios will continue to decrease, creating more stress. Who knows if they’ll go bankrupt, but they need to find a buyer.
TheStreet.com: Do you see more bank mergers coming?
Bove: No, because the Fed and FDIC won’t allow them, even though some banks may be looking for buyers. When the regulators see tremendous difficulties in the industry, they put a freeze on mergers. They worry that a small bank taken over by a large one will cause problems for the large bank.
TheStreet.com: What is the impact of all these things on retail bank customers?
Bove: The retail customer is getting screwed on deposits beyond belief. Take a look at what the big banks are paying. If you have savings, you have to go to money-market funds or [Treasury securities for decent yields].
On the flip side, you’re getting screwed by mortgage costs. Mortgage rates are up dramatically, as banks fight to get those rates high enough to pay for deposits. Looking at auto loans, with car prices down, many borrowers are upside down on their loans.
So banks’ retail customers are getting actively harmed on both sides. They aren’t getting market rates for deposits and are paying top rates to borrow. That’s unfair.
The author of this story owns shares of JPMorgan Chase.
