Bove Says Shares of U.S. Banks May Quadruple by 2012

March 24 (Bloomberg) -- Bank stocks, the leaders of the biggest U.S. market rally since the 1930s, may quadruple over the next two to three years as loan defaults decrease, according to Dick Bove of Rochdale Securities LLC.

“Stocks are going to go much higher,” Bove, who is based in Lutz, Florida, said in a telephone interview. “The catalyst is the reduction in loan losses. That’s all that investors in banks care about.”

The Standard & Poor’s 500 Financials Index has risen 162 percent from a 17-year low one year ago as the U.S. government spent, lent or guaranteed more than $8 trillion and the Federal Reserve kept its benchmark interest rate near zero to end the worst recession in seven decades.

Bove said the financial industry has already seen a “bottom” in writedowns from the collapse of the subprime mortgage market that spurred losses of almost $1.8 trillion, freezing credit markets in 2008.

Financial shares had the only gain today among 10 industries in the S&P 500, climbing 0.2 percent.

A decline in provisions for bad loans may overshadow industry profits, he said. Earnings at banks in the S&P 500 are projected to fall 33 percent in the first quarter, before rebounding 63 percent in the second quarter, according to the average analyst estimates compiled by Bloomberg.

Improvement in Loan Quality

“Investors have decided they will bet on that rather than worrying about fundamentals,” he said. “The fundamentals are not good. The first quarter will not show any particular strength in bank earnings. What it will show is an improvement in loan quality and that’s all people are looking at.”

Nearly 60 percent of the “big public companies” will lose money in the first quarter, Bove said.

Bove is the highest-ranked analyst at estimating share- price movements of Morgan Stanley, according to data compiled by Bloomberg. The results of his predictions have been mixed. He recommended selling Lehman Brothers Holdings Inc. stock four months before it collapsed, helping investors avoid a 65 percent plunge in the shares. Bove raised it to “buy” on Aug. 21, 2008, and Lehman filed the world’s largest bankruptcy three weeks later.

While Bove has “buy” ratings for Bank of America Corp., Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc., he said investors should sell SunTrust Banks Inc. and Wells Fargo & Co.

SunTrust

SunTrust is “not making any money,” he said. Analysts on average estimate the lender will lose $1.41 a share this year, excluding some items, according to data compiled by Bloomberg. “Why would I want to buy into a company that isn’t going to make any money for 12 to 18 months?”

On Wells Fargo, Bove said that “the earning assets of the company are declining, the non-interest income is declining and the non-interest expenses are rising.”

SunTrust’s spokesman Michael McCoy and Wells Fargo’s spokeswoman Julia Tunis Bernard declined to comment.

Bove expects that the dividends at U.S. banks will increase over the next two to three years. The S&P 500 Financials Index pays 1.05 percent of its average share price in dividends, compared with 1.83 percent for the S&P 500, according to data compiled by Bloomberg.

“The government at the moment is saying you can’t do it,” he said. “These banking companies were at one point in time yield vehicles and they were owned by income funds. The banks are going to get back to being that type of investment.”