Last July, banking analyst Dick Bove released a report entitled “Who Is Next?” The report was actually quite positive about the banking system in general, saying it “is not anywhere near the danger that existed in the late 1980s and early 1990s despite all of the whining by public officials.”
No one cared about that part. The headline grabbing bit was a list of banks that Bove, channeling Kenny Logins, said had flown into the “danger zone.”
Bove ranked the largest 107 banks and thrifts that collectively held 79 per cent of financial sectors assets. One of the crucial tests Bove applied was the ratio of common equity plus loss reserves to non-performing loans. Any bank with a ratio over 40 was said to be in the danger zone. Only eleven banks actually made it into the danger zone: IndyMac, Downey Financial, Doral Financial, BFC Financial, BankUnited Financial, Corus Bankshares, FirstBanCorp., FirstFed Financial, Flagstar Bancorp, Santander BanCorp and Washington Mutual.
Ironically, a bank that wasn’t even on that list filed a lawsuit claiming they were defamed by the report. Bove said the BankAtlantic Bancorp had a ratio of equity plus reserves to non-perfoming assets of 38.4 per cent. But they didn’t like being on any list with Indymac on it, so they sued. They also claimed that Bove’s calculations were buggy.
Apparently, the mounting litigation costs were scaring off Landenburg Thalmann, where Bove has worked since it purchased Punk Ziegel & Co., where he had worked since 2004. Bove didn’t want the firm to settle, so he quit today to continue to fight the lawsuit.
“The only way I could protect Ladenburg from more legal fees was to leave the firm and see if I can’t get it resolved on my own,” Bove said, according to this Bloomberg report. “The fact that I’ve had to leave a really good company because of this lawsuit is more than a little upsetting.”
So where does Bove, whose been an analyst since 1965, stand on the banking sector these days? He’s bullish on the banks.
“The financial sector is likely to recover soon while the economy will suffer for some time,” Bove wrote in a note yesterday. “Banks will stabilise their balance sheets while continuing to see loan losses rise. It is strongly felt that the declines in bank stocks have been extreme, and that these companies represent appealing investments.”