Banks are 'cheating' depositors: Analyst

Bank of America's second quarter results topped analyst estimates. Odeon Capital Group Financial Strategist Dick Bove tells Yahoo Finance Live that BofA's results show that "on a year-over-year basis the numbers look pretty good, but on a quarter-over-quarter basis, it shows that there is some weakness developing." Bove also says that the big banks are "feeling the same stress" over deposits. "Banks are cheating the depositors. Basically, banks got this huge windfall gain as a result of something they had nothing to do with, the Fed increased interest rates, and they didn't pass it along to their depositors," Bove said in the interview. Bove adds that "the results is, in a deposit basis, even the big banks are showing declines in deposits."

Video Transcript
DIANE KING HALL: Bank of America beating the Street with results this morning. Profit jumped 19% year-over-year and the second quarter to $7.4 billion or $0.88 a share. That's ahead of forecast expectations of $0.84 a share.

Now, BofA's net interest income also rising 14% to meet expectations at $14.2 billion. But it indeed falls short of JP Morgan's 44% jump last week. Now, Brian Moynihan calls it quote, "one of the strongest quarters in the company's history." Of course, don't miss our interview with Bank of America CEO at 3 PM Eastern Time.

Joining us for analysis on the quarterly results, we have Dick Bove, Odeon Capital Group financial strategist. Dick, thanks so much for joining us once again. So let's jump right into the results from Bank of America today.

It was a beat. You had an initial pop in the pre-market in response to its earnings. It's cooled a bit, as they handle their earnings call. What's your first takeaway?

DICK BOVE: Well, I think that what you're seeing is that on a year-over-year basis, the numbers look pretty good. But on a quarter-over-quarter basis, it shows that the there is some weakness developing.

And I think that's a traditional-- well, I shouldn't say, traditional. I think it's similar to what other banks are showing in the quarter. In other words, what we're seeing is if you're solely in the banking business, a PNC, for example, you're not doing particularly well. If you have a big capital markets operation to assist you, and JP Morgan or a company like Wells Fargo, which you're seeing is some strength in that area.

So I'd say that what Bank of America is doing at the present time is showing those trends. The banking industry weakened. The banking business weakened in the quarter-over-quarter results. And they were surprisingly strong in the capital markets arena. And I think if you're looking forward for banking, again, you have to make your call on whether there's going to be a recession or not.

But if you're looking forward, I think that the trends that you're likely to see are similar to what we saw in this quarter. I think that you're going to see capital markets activity being very strong over the next few quarters. You're going to see banking being lackluster.

You'll see some little pickup, maybe in commercial industrial lending. But home mortgages should be flat. And you should see credit card lending, which was extremely strong coming down somewhat as people are borrowing a little bit too much right now for their income.

JULIE HYMAN: Yeah. We did see an increase in credit card write offs for Bank of America. Although, it's still well below where it was even pre-pandemic, which is interesting. Something else that stuck out to me Dick is consumer unit deposits, which were down 1% quarter-over-quarter.

On a relative basis on that front, how is Bank of America doing versus its competitors?

DICK BOVE: Well, again, JP Morgan's numbers are all messed up because of the acquisition of First Republic. If you took the First Republic numbers out of JP Morgan, OK, you would see that JP Morgan's, if you will, organic numbers were down across the board.

So I know people get very enthused about the JP Morgan numbers. But they tend to forget that they're not as a result of organic growth at JP Morgan. The result of a major acquisition, which gave them $2.7 billion in profits.

All right. So if you take a look at the deposits at JP Morgan, you take a look at the deposits at Wells Fargo, if you take a look at the deposits at Bank of America, they're all feeling the same stress. And they're feeling that stress for a very logical reason.

The banks are cheating the depositors. Basically, the banks got this huge windfall gain as a result of something that they had nothing to do with the fed increased interest rates. And they didn't pass it along to their depositors. So the result is that on a deposit basis, even the big banks are showing declines in deposits, despite this theory that everybody's taking money out of the regional banks and putting it into the big banks. I'm not seeing that.

Although, PNC's deposit numbers were not particularly good at all in this quarter. I think that if the banks want these deposits back, it's easy to get them back. All they have to do is raise their rates closer to a market rate. They are reluctant to do that however because their margins are not doing well.

They're in a box because the yield on their assets are not enough to allow them to pay market rates on deposits. So they don't pay market rates on deposits. And the deposits go to money market funds or other areas. But they don't stay in these banks.

DIANE KING HALL: So in their earnings report, net charge offs increased to $869 million. So it's up from a year ago. And total loan loss levels are at $602 million. Is that concerning at all for you for Bank of America. Dick?

DICK BOVE: Yes, it is. I think that what you're going to see is a very, very significant increase in loan losses in the consumer sector over the next couple of quarters.

I can give you a simple example, which tends to bear what I'm talking about. One of my friends called me the other day and said that he bought a car three years ago for $63,000. The blue book value of that car today is $36,000. But the size of his loan is $45,000. And he's got four years to go in paying for that loan.

If you multiply him by hundred of thousands of auto buyers over the last three years, you'll find that they're in a similar situation because used car prices are coming down. And they took these six- and seven-year loans outstanding. And that is going to hit them hard. And not every one of them is going to continue to make the auto payment. And if unemployment were to rise at all, then you would see a substantial increase.

The same deal is going on with credit cards. People got this huge largesse in terms of all of this money dumped into their pocket by the government, a few years ago. That money is now been spent. And so now, they're borrowing. And they're not borrowing on necessities. They're borrowing on tourism, on homes outside the house, on a variety of recreational products.

I think the consumer is in a very vulnerable position. And I think that loan losses will increase substantially as they said a minute ago, over the next few quarters.

JULIE HYMAN: And Dick, just finally, quickly, I want to ask you about Morgan Stanley on the other side of the spectrum. the non-consumer bank side of the spectrum. Because they're, too, even though at some of its competitors trading operations were a little bit stronger Morgan Stanley's results were middling, I guess. Is that your assessment?

DICK BOVE: They disappointed me because I raised the rating on Morgan Stanley last Thursday expecting that they would show much stronger results in investment banking, and better trading. I realize that trading would not be good because it just hasn't been good for anyone, except for Bank of America.

And I realized that the first two months of the quarter were not great in investment banking. But June was so strong in terms of a massive increase in M&A activity and in equity offerings. That I thought Morgan Stanley would do much better than it has. So I'm disappointed by those results.

JULIE HYMAN: Dick, it's good to see you. Dick Bove, Odeon Capital Group financial strategist, and on the topic of financials and of Bank of America. Stay tuned for our 3 to 5 PM show. Our executive editor, Brian Sozzi, is going to be speaking with Bank of America CEO, Brian Moynihan, on the back of those earnings. You don't want to miss that.


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