Dick Bove “open letter to Bob Pisani”
Chris Hohn the founder and manager of TCI Fund Management was the star speaker at this year's London Value Investor Conference, which took place on May 19th. The investor has earned himself a reputation for being one of the world's most successful hedge fund managers over the past few decades. TCI, which stands for The Read More
I have been listening to your theory that low interest rates for long periods are devastating for bank earnings. So, I decided to check what history shows. I discovered two periods that may be described as lower for longer:
During the Depression and through World War II the yield on the 90-Day Treasury Bill stayed below 1.00% for 15 years. In that time frame the FDIC tells us bank earnings rose 66.6% of the time.
From 2009 to 2015, the 90-Day T-Bill yield averaged 9 basis points. Bank earnings, again using FDIC numbers, were up 71% of the time. Interestingly, at the end of the period in 2015, commercial bank earnings hit an all-time record and 4 big banks were among the top 10 money makers of all companies in the U.S.
Your theory also seems to conflict with the monetary theory of the bank regulators. It has been the policy of the Fed for decades to manipulate interest rates to stimulate economic growth. The Fed and central banks around the world have operated under the belief that lowering interest rates stimulates borrowing and this in turn creates economic growth. Your theory argues that these bankers have been wrong for a very long time or conversely that increased bank lending has no impact on bank earnings. It is also interesting to note that the lower for longer theory avoids another issue. For example, when interest rates go down the value of fixed income securities go up. Since 20% plus of the assets of American banks, according to the FDIC, are invested in securities, this means that the value of these portfolios is rising appreciably. There is a sizable unrecognized capital gain here. This capital gain will be monetized in future quarters driving earnings higher. Then there is the mortgage sector. The current “rule of thumb” is that if mortgage rates are 50 basis points below the current mortgage rate, homeowners should refinance. The lower for longer theory indicates that a mortgage refinance boom is quite likely. Historically, this has meant much higher profits for banks.
Stepping aside from the lower for longer theory, I continue to be perplexed by the fact that bank earnings are floating around all- time record levels and no one is explaining why this is the case. Also unexplained is why, at least the banks I follow, can pay out all- time record amounts of cash to shareholders if the industry is in such terrible trouble as described by the pundits.
Your move Bob Pisani