Banks' woes are bad news for consumers: analyst Bove

It’s been a rough few years for banks.

Their stock prices have slumped in four of the last five years, according to the calculations of veteran bank analyst Dick Bove, chief financial strategist at Odeon Capital Group. Over that five- year period, only four of the 106 banks he follows have outperformed the S&P 500.

And Bove thinks the banking sector’s carnage will continue, hurting retail customers like you.

Related: S&P Global cuts several U.S. bank ratings, citing tough climate for lenders

With big banks’ third-quarter earnings reports coming up later this month, we interviewed Bove to get his views on the industry. Here is what he had to say.

TheStreet: What are you looking for in the earnings reports?

Bove: Results will be mediocre, with a small increase in loan volume overall. Deposits will be flat to down, and margins will be flat to down. Loan losses will be up, particularly for consumer banks. Expenses will be flat, because banks must spend on technology [erasing the impact of cost cuts]. The industry is facing significant difficulties.

TheStreet: What are those difficulties?

First, banks are losing market share to capital-markets companies like Goldman Sachs and to non-bank companies. Banks can’t compete effectively on price.

Second is the mammoth problem that governments realize banks are creating more risks than benefits. The bank failures in March, such as Silicon Valley Bank, weren’t banks that are too big to fail.

But they became that, because the president said the government would guarantee all deposits at all banks. That’s impossible. The government realized that if it didn’t reduce the risk of banks to the government, then at some point there would be a massive problem the government can’t deal with. It can’t go to the Fed and say, “create $2 trillion.” The government is trying to shrink banks.

TheStreet: What are the banking sector’s other problems?

Bove: First, bank balance sheets are false. Bank of America  (BAC) - Get Free Report, using government-approved accounting, has $17 trillion worth of securities. But the yield of those securities is below 3%, [while market yields are much higher.] So it’s not worth $17 trillion. The value of assets like mortgage and auto loans aren’t what banks claim. Investors aren’t morons. They realize balance sheets are phony.

Finally, and most importantly, the financial system is changing. During the pandemic, the U.S. did a series of things to protect households from depression. The Fed expanded the money supply by $7 trillion.

Now, the Fed can unwind, so it has reduced its balance sheet by almost $1 trillion in the last 18 months. They have gone from exploding money supply to reducing it. That’s never happened before.

The cost of money was virtually nothing, and all of the sudden, they’re going in the opposite direction. So, now money isn’t freely available.

Banks can’t hold on to the money [of depositors]. The yields on their assets aren’t high enough to allow them to pay depositors a market rate. There’s a multiplier effect in the wrong direction. It’s affecting mortgage, auto and credit card loans. It’s having a massive impact on banks.

TheStreet: And what’s the net impact of this?

Bove: Banks are in trouble because of the government, which no longer likes the structure of the banking system. It’s moving aggressively in the wrong direction. The risk is shifting to the government. It doesn’t have to worry about loans going bad. But the government knows it doesn’t have enough money to truly protect the banks. Investors aren’t suckers.

TheStreet: What’s the effect of all these difficulties on retail banking customers?

Bove: It’s a major problem for them. They will pay a lot more for whatever they borrow. It will be more difficult for whatever they want to buy – whether that’s a car, house, or trip to Italy. High interest rates will bite.

Also, it will be harder for consumers to get money. A proposed regulatory change by the government would increase the capital cost for banks to make a loan. That’s because the government would raise bank capital requirements.

So banks won’t make the loan. Retail customers can’t keep spending, because the money isn’t flowing. The retail customer is the one who gets hurt.