Banking Industry on the Brink of another Golden Age With 20% Profit Gain

Banking Industry on the Brink of another Golden Age With 20% Profit Gain

2/12/2011

The banking industry is perceived to be entering another “golden age,” loaded with a huge cash reserve that earnings are predicted to grow by as much as 20% annually in a span of a couple of years. This was revealed by a famous banking analyst, Dick Bove, in an interview over CNBC.

Bove said that, “There’s so much cash in some of the banks in the United States that they’re actually selling at below their cash value per share.” The well-known analyst also added, “For example, Citigroup, Bank of America, Bank of New York, State Street, Northern Trust—they all sell at below their cash per share.”

According to Bove, what this means is that these companies now possess a huge amount of liquidity, which can be later put to use to generate more earnings growth. He said, “…And I think that for the next two to three years, what you will see is that banks will actually increase their earnings at about a 20 percent rate per year, which will be far faster than what you’re going to see from the industrial averages.”

Bove rejected the opinion that the recent profitability of these banks was mainly because of the easy credit policies of the Federal Reserve. “They have just completely restructured their balance sheets,” Bove said.

He also dismissed any worries about the foreclosure fiasco, where banks are being confronted by potential legal costs of colossal proportions because of sloppy and at times, negligent processing of mortgages.

As Bove would put it, “They’re legal problems, not financial problems.” He added, “The banking industry is almost like the tobacco industry or the asbestos industry. And by that I mean, for the next 5 to 7 years, they’re going to have to allocate a big chunk of revenue simply to paying legal bills.”

WRITTEN BY:

blakeh@wellsdrew.com