One on One with Dick Bove of Rochdale Securities
Thursday, May 07, 2009
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SUSIE GHARIB: All right, Darren. Let's get some more analysis. We're joined now by Dick Bove, veteran banking analyst at Rochdale Securities. Hi, Dick.
DICK BOVE, BANKING ANALYST, ROCHDALE SECURITIES: Hi, Susie.
GHARIB: You know, the whole point of these stress tests was to check to see how physically fit the banking system is. Based on the new requirements that regulators are asking banks to do and what you heard today, are banks in good shape or bad shape?
BOVE: Well, banks have been in good shape for quite some time. I think that if regulators focused on the cash flows going through the banking industry, they would have seen that the cash flows are unusually positive which means that the banking system is healthy and the banks are solvent.
GHARIB: And the other thing that we're going to see out of this is that you know some banks are going to lead to mergers, the strong taking over the weak. Do you think that these super banks are a good thing for the banking system because we have seen a lot of the regional banks during the financial crisis were actually in better shape than the big banks?
BOVE: Well, actually, I don't think the regional banks are in better shape than the big banks. I think they are in weaker shape. I think many of the regional banks aren't going to show a profit for at least the next 12 months. Also I don't believe that anything out of the stress test would suggest that there is going to be mergers among the top 19 banks in the country. There is no need for that to happen. But should the United States have super banks? I think the question should be phrased differently. Do you think the United States should be a second rate financial power? In other words, do you think the banks all around the world outside the United States should be significantly larger than banks within the United States? If you come to the conclusion that the United States needs to be a financial power of the first rank, it must have super banks.
GHARIB: Darren, did you get any sense when you were listening in on these conference calls that the banks have any concerns about raising the necessary capital required by the government?
GERSH: Well, regulators are quite confident or seem quite confident that the banks could raise this money on their own and from private sources. And there was a little bit of stick here because they also made it clear that any bank that has to come back to the Treasury for more funds will get a closer look at who runs the bank. They said that they are going to take a look at whether the banks have the right management in place to manage through the economy, the current economic crisis that we're going through. You know, you don't get to be a CEO if you can't read between those lines.
GHARIB: Right, but Dick, do you think, though, from the public's perspective they are going to see this list of the winners and the losers so to speak and they might pull out their deposits depleting some of those banks that need the money to be deprived of necessary capital?
BOVE: Well, I think we've got pretty good experience going back decades that as long as the public believes that their money is ensured within their local banking institution, they're going to keep it in that banking institution. The people who will pull their money out are the people who lend money to the banks and the wholesale markets. In other words, if are you providing commercial paper loans to a bank, you may decide to move away from Keycorp or from Bank of America and go to JPMorgan or Goldman Sachs where you feel your money will be much safer.
GHARIB: So Dick what do you think is going to be the market reaction tomorrow to all this news and to specific banks?
BOVE: Well, I think for those companies that are going to have to raise capital that the prices of the stocks are likely to go lower until the capital is provided, because you know it's a negative event. You have to dilute shareholders to raise capital. For those companies that do not have any requirement to raise additional capital and who are likely to start paying back the TARP funds to the government, I think those stocks are likely to go higher because those companies are likely to increase their share of market against the weaker institutions.
GHARIB: Darren, what about the banks that are going to pay back their TARP funds? Did you get any new information on that today?
GERSH: Well, it looks like the Treasury is going to make that a pretty difficult thing to do. Because basically a lot of these banks have been lending out, I mean they've been issuing debt that's backed by the FDIC. And before they can pay it back, they're going to have to show that not only can they keep lending through the current economy, but also that they won't need that FDIC guarantee. So that's quite a bit of a boost to the bank. So it's going to make it a tougher hurdle. Now they do expect to get some money back perhaps on the order of $25 billion but I don't think they expect to get it back right way.
GHARIB: Dick can you name any of the stocks that you think would be a good investment for investors now based on these results? What banks are on your buy list?
BOVE: Well, I think that Goldman Sachs, Morgan Stanley, U.S. Bancorp, I would buy Wells Fargo. I this that JPMorgan, I think PNC Financial, BB&T, there are quite a few banks that I think are very attractive at the present time because again I don't share the perspective that these banks are troubled. I think their cash flows are positive. They are profitable and I think the outlook is much better for these companies than is inherent in the stress test.
GHARIB: For disclosure reasons, do you own any shares in these stocks you are recommending?
BOVE: No, I don't own them nor does my company.
GHARIB: All right, thank you very much, Darren. Thank you very much, Dick, appreciate both of you giving your insights on this topic.
GERSH: Thank Susie.
BOVE: Thank you.
GHARIB: Our guest tonight, Dick Bove of Rochdale Securities.
