Analyst Bove: U.S. banking sector's outlook better than believed

(Reuters) - The U.S. banking sector may be considerably stronger than what conventional wisdom suggests, and the decline in bank stock prices has been excessive as many of these stocks represent "excellent" values, according to veteran banking analyst Richard Bove.

U.S. government programs will work and the negative assumptions concerning the weakening of the economy may be excessive, the Ladenburg Thalmann analyst said in a report that reviewed the banking industry based on data from the Federal Deposit Insurance Corp for the third quarter of 2008.

"To this point investors in bank stocks have paid little attention to the new programs believing them to be inadequate to reverse the economic decline underway. Therefore, bank stocks are falling to levels not experienced since the late 1980s and early 1990s," Bove said.

"One sector that is already reacting to the government is the mortgage refinance industry that is now beginning a new boom," the analyst said.

Banks have now become a safe haven for consumers as the FDIC has increased its coverage of bank deposits and raised the guarantee on individual accounts by $150,000 and moved to insure all demand deposits in banks no matter how large, Bove said.

Also, bank assets are growing due to the rise in funding availability, and the desire to increase liquidity and the need to absorb foreclosed assets, he said.

"There is reason to believe that a mortgage refinance boom is about to begin and this will change all of the metrics. Loan volume is expected to grow, again. However, the loans being originated will be more conservatively underwritten," Bove said.

The "wild" standards of the past few years will return, but not for some time, he added.

Losses reported in the third quarter suggest banks will be forced to add at least $10 billion to $12 billion to their reserves each quarter just to replenish the deficit in available capital to meet their needs.

But banks cannot generate this money from operating results as the industry's performance over the past 7 quarters shows growth in net income is weakening and the fourth quarter may see a loss, Bove said.

"This leads to the belief that further dividend cuts are needed and the industry must sell more common stock," he said.

"Sale of preferred stock is simply not adequate to offset the decline and most bank balance sheets cannot stand further additions of preferreds even if the opportunity to sell them existed," Bove added.

However, if the policies of the U.S. Federal Reserve and the Treasury work and the liquidity being injected into the markets is effective, the reserve gap would be neutralized by a gain in asset values and the banks would not need any equity contributions, the analyst said.

(Reporting by Antonita Madonna Devotta in Bangalore; Editing by Pratish Narayanan)