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Investment

Dick Bove: 4 reasons to 'keep buying bank stocks'

In the past year there have been four massive changes in factors that determine the outlook for banks:

  • A new tax regime has been put in place for corporations.
  • There has been a significant shift in monetary policy.
  • The banking regulatory regime has been torn apart and is being rebuilt.
  • Advances in technology are changing the nature of the business.

Virtually every one of these developments is positive for the banking industry. Moreover, in the just ended fourth quarter, banks took advantage of the need to adjust their tax structures by also adjusting their balance sheets and income statements. Losses were pulled forward so the slate could be cleaned for 2018.

Like it or not, banks are entering a true “Nirvana” here on earth. They are about to do very well for a long, long time. The only impediment that could derail this outlook is an economic recession and this does not look likely at the present time.

Tax reform

The average bank in the United States has paid a tax rate of 30 percent to 31 percent. Under the new tax law these companies get two direct benefits. They will be reducing the rate they pay by an estimated 8 percent to 12 percent depending on the institution. They will hold on to some of their tax deductions like the ones created by investing in low income multifamily housing. The result is that some of the nation’s biggest banks will have effective tax rates of 18 percent to 19 percent.

Moreover, if the tax bill is effective in stimulating additional economic growth, banks will do more business. They will make more loans.

In sum, banks will be able to hold on to more real money. There is a real cash benefit here. Some of this money will be used to invest in the business. Some will be used to cut prices. More will be allocated to increasing employees pay and charitable deductions. However, at the end to the day, the banks will pocket more profit.

Monetary Policy

True interest rate movements last for 25 to 30 years. The low rates established in the early 1930s did not change convincingly until the late 1950s. Then rates rose for the next 25 years until they topped out in the early 1980s. The next move was down and it continued until the mid-2010s.

Now rates are on the move again. The Federal Reserve has decided to shrink its balance sheet and it appears to be committed to the policy begun in late 2015 to raise rates. If this is the Fed’s intention and global economic growth has truly turned higher, interest rates could be in an uptrend until the early 2040s.

The banking industry has generally reacted positively when rates are in a sustained uptrend. Note the surge in bank earnings in the 1970s a time when interest rates rose to historic peacetime levels in the United States.

Regulation

The name and function of the following agencies is unimportant. What is important is that they all, in some manner, regulate banks, banking or banking products. They include the Financial Stability Oversight Council, Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, Commodity Futures Trading Commission, Securities and Exchange Commission, Consumer Financial Protection Bureau and Federal Housing Finance Agency.

What is of importance here is that the leadership of all but one of the agencies has been changed in the past year. In some like the FSOC and the FRB, there has been a total revamping of their Boards of Directors or Governors. To my knowledge nothing like this has happened since the 1930s when a number of these agencies were first created.

The new regimes do not agree with the policies of the old ones. The old teams were committed to government control of the American banking system. The new teams are committed to easing and adjusting a number of the old team’s regulations. The new regimes have the power to do this as long as they stay within the broad guidelines of the Dodd Frank legislation and those guidelines are very broad indeed.

There are a series of big benefits coming to banks here. They start at the nature of the stress test and they continue to the Volcker Rule and along the way ease virtually all requirements for smaller banks.

Technology

There is a myth that banks lag general industry in the creation and implementation of advanced technology. But this is simply not true.

Bank of America owns the most block chain patents, at 43, according to Envision IP, and several banking giants are partnering to create their own cryptocurrency. Banks have the ability to recognize you if you are in a foreign country so that you can withdraw money from your account in seconds. You can pay your bills using a mobile phone. Banks can send thousands of bits of data over thousands of miles in seconds with error rates that are virtually zero. Using artificial intelligence they are able to calibrate your credit worthiness without human intervention.

The point here is that if anyone chose to look they would discover how advanced banking technology is. This technology has reshaped bank products and distribution systems in a fashion that lowers the cost of running a bank.

Bottom line

There are four compelling changes impacting banking. They are all positive. They are the reason to keep buying bank stocks.

Commentary by Richard X. Bove, an equity research analyst at the Vertical Group and the author of “Guardians of Prosperity: Why America Needs Big Banks” (2013).

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.

Source: Investment Cnbc
Dick Bove: 4 reasons to 'keep buying bank stocks'

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