One on One with Richard Bove, Banking Analyst with Punk Ziegel & Co.
Thursday, December 13, 2007
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SUSIE GHARIB: Lehman Brothers said today its quarterly earnings fell 12 percent, hurt by $830 million in write downs tied to sub-prime mortgage losses. Lehman earned $1.54 a share in its fiscal fourth quarter, down from the year ago period, but $0.12 ahead of analyst expectations. This is the first time since 2002 that Lehman's earnings have fallen for three consecutive quarters. Lehman is the first of the big investment banks to report. We'll get a better picture of the impact of the mortgage meltdown next week. That's when Goldman Sachs, Morgan Stanley and Bear Stearns report their quarterly results. Joining us now with more analysis on Lehman and the outlook for the banking sector, Richard Bove, banking analyst with Punk Ziegel and Company. Hi, Dick.
DICK BOVE, BANKING ANALYST, PUNK, ZIEGEL & CO.: Hi, Susie.
GHARIB: So Lehman executives said today they don't expect to take any more big write-downs. Is the worst over for Lehman?
BOVE: In all probability it is. I think that everybody expected these companies to try and use what I'll call a kitchen sink approach to use the cliche to get rid of as much of their bad loans in this quarter as possible. And then next year they have the opportunity to grow their business. But I think that's the critical issue. The critical issue is that I think the 2008 is going to be a very weak year for the brokerage companies because most of the core businesses which resulted in their significant increase in earnings over the last three to five years will not be very strong.
GHARIB: Is that going to be the same story next week when we hear from Goldman Sachs, Morgan Stanley and Bear Stearns? What are your expectations?
BOVE: Well, I think so. I think again I believe that Goldman Sachs won't get hurt as bad as the other two companies. But I think the other two companies will actually lose money. And that of course is very negative and it reflects poorly on management decisions in the risk management area. But the fact is again, that no one really cares that much about how much they lose in the fourth quarter because the expectation is that it will be a big number. The real issue as I say is will the mortgage business, will the hedge fund business, will the private equity business, will the credit derivatives businesses all snap back in 2008? And if they don't, and I don't believe they will, then these companies won't have good earnings all through next year.
GHARIB: And how about the banks, the traditional banks. What kind of financial shape are they in, especially given yesterday Bank of America giving a gloomy outlook for its fourth quarter in the year ahead. And then moments ago Citibank saying that it's either reduced or consolidated some of its debt obligations.
BOVE: OK, well I think taking the last point first, the Citigroup announcement is very negative because those people who believe that Citigroup is going to cut its dividend and I'm not in that camp, but those people who believe that that will happen will see this as another reason to argue very strongly that the stock -- that the company will have to cut the dividend because basically this increases the size of assets. And it increases the size of assets with bad products. And therefore presumably Citigroup will need more equity and therefore the dividend needs to be cut. In the case of Bank of America, they just frightened the heck out of everybody because they said that there will be a lot of big loan losses near term, but we're also going to have loan losses next year and beyond. But despite, again, these negative pieces of information which are coming out, I think the banking industry will benefit from the problems that the brokerage industry is having. In other words, people who cannot any longer borrow money through the brokerage system will go back to the banks. So I think the banks will show good increases in earnings. I think their dividends will actually go up next year. And Bank of America actually yields 6 percent. That's a very attractive yield.
GHARIB: So what is your view on these financial stocks? Is it time to start buying them?
BOVE: I think so. There's the old cliche about don't catch a falling knife. But in this case, I do want to catch it. And I want to catch it if it is a bank which is yielding 6 percent or in the case of Citigroup, 7 percent or in the case of many of these small regional banks like BB&T and PNC and Wells Fargo and Regions Financial, these dividends are just too compelling to give up. And in 2008 the earnings of these companies in the second half should be moving ahead relatively strongly.
GHARIB: Dick do you own any of those banks or do you have any other disclosures to make about them?
BOVE: No, I don't own them and we don't do business with them.
GHARIB: We have a few seconds left. Looking ahead to 2008, is it going to be a year then of mergers and acquisitions because of the troubles going on in the banking sector?
BOVE: Yes, absolutely. In other words, generally speaking banks merge very rapidly in periods when the economy is doing poorly. And they don't merge when everything is going well.
GHARIB: All right, Dick thank you so much. We really appreciate your thoughts. My guest tonight, Richard Bove, banking analyst with Punk Ziegel and Company.
