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Buying back stocks is a ‘horrible’ thing for banks to do: Dick Bove

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Stock buybacks may be on the rise, but noted analyst Dick Bove warned that is something banks shouldn’t be doing.

“I am a big believer that buying back stock is a horrible thing to do for a bank. It’s like an oil company giving away oil for stock. You don’t do it. You don’t give away capital for stock either if you are a bank,” the chief strategist at Hilton Capital Management said on “Closing Bell” Friday.

Public companies are expected to return more money to shareholders this year in the form of stock buybacks and dividend increases. Through the end of April, S&P 500 companies are on track to give back a record $1 trillion to investors, according to S&P Dow Jones Indices.

After passing the Federal Reserve stress tests last June, several big banks announced plans to buy back more of their stock.

Bove said the theory is since the big banks can’t grow larger, they can give away capital.

“I don’t believe that’s true,” he said. “We’re looking at a period where the need for money is going to grow exponentially at a time when the availability of money is declining.”

That’s because there is now a “massive change” going on in the financial industry, he explained.

“For the last 20, 25 years if you wanted money it was there,” Bove said. “Now money supply is not growing. It’s not growing because the Fed is shrinking its balance sheet.”

The Federal Reserve is now in the process of winding its $4.5 trillion portfolio, known as its balance sheet. It consists mostly of government debt accumulated in the years after the financial crisis.

Overall, Bove is bullish on the banking sector, which has seen a strong first-quarter earnings season.

“The banks are entering a so-to-speak golden age in which they are going to be able to earn consistent increase in earnings, unless there’s a recession,” he said.

“If there’s a recession, they’re dead. Without that, I think the earnings are in a big upturn.”

He specifically likes the smaller-cap banks, which are “just killing” the big banks in terms of stock performance.

In fact, from 2000 to 2017, mid-cap bank stocks were up 20 percent a year on average, while the biggest universal banks were down, Bove said.

“There’s no comparison whatsoever.”

His top picks include Silicon Valley Bank, which he calls a “huge winner,” and Pinnacle Financial.

— CNBC’s Fred Imbert and Jeff Cox contributed to this report.

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Lockdowns after China’s new Covid-19 outbreak impact steel, iron ore

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This aerial image taken on June 6, 2019 shows a steel factory in Chengde, China’s northern Hebei province.

FRED DUFOUR | AFP | Getty Images

SINGAPORE — A new wave of Covid-19 cases in China’s Hebei province triggered transport restrictions in the major steel-producing region.

The lockdowns in Hebei include areas surrounding steel mills, limiting the ability to transport the metal to customers. China is the world’s top steel producer and analysts say Hebei contributes over 20% of the country’s total output.

Coronavirus cases in Hebei have been rising since the start of the year, prompting the province to lock down its capital, Shijiazhuang, and at least two other areas in an effort to contain the spread of the coronavirus.

The curbs are unlikely to affect steel production for now, but they could hurt demand by spurring the manufacturing sector to stop work earlier than planned ahead of the major Lunar New Year holiday, commodity data provider S&P Global Platts said earlier this month.

Demand and prices for raw materials used to make steel like iron ore could also shoot up, according to analysts.

Restrictions in Hebei

Steel deliveries by truck have been suspended in Hebei, leaving rail as the only way to transport steel, Shanghai-based Chinese metal data provider Mysteel said in a note last week. The report said blocked roads have led to completed steel piling up at major mills in the region.

“Partial lockdowns have restricted the transportation of goods, resulting in a sharper build in inventories held by local steel mills rather than at stockists in the first half of January,” said Atilla Widnell, co-founder of Singapore-based Navigate Commodities, in an email to CNBC on Monday.

“We have heard anecdotal evidence that some stockists and traders are reluctant to tie up cash flow in-case a ‘soft lockdown’ is prolonged or intensified,” he added.

S&P Global Platts said inventories are rising at the Jingye Iron & Steel mill in Hebei’s capital city Shijiazhuang. The firm cited a source at the mill, which produces 13 million metric tons of crude steel a year.

Manufacturing, construction sectors stopping work

Manufacturing and construction sites in China are set to stop work earlier than usual ahead of the Lunar New Year holiday between Feb. 11 and 17. That’s likely to hit demand for steel, which is heavily used in those sectors.

The government advised manufacturing and construction workers to return home before the peak holiday travel period, said S&P Global Platts.

“According to market sources, Beijing has done this in (an) effort to reduce the possibility of a spike in COVID-19 cases during and after the Lunar New Year holidays,” the firm wrote.

Work stopping earlier suggests steel demand is set to drop, causing inventories to rise elsewhere.

“Some traders said they were unwilling to increase their steel inventories as they anticipate having to hold on to these for much longer than usual, and with steel prices continuing to soar, building inventories will put pressure on their cash flows,” S&P Global Platts added.

Impact on steel, iron ore

Daniel Hynes, senior commodity strategist at Australian bank ANZ, told CNBC on Monday that risks could spread to iron ore.

“There are concerns that a further rise in coronavirus cases in Hebei could result in some steel making regions being locked down. This would obviously impact demand for iron ore, as steel mills would likely see supply chains disrupted, thus impacting steel production,” he said in an email.

The ripple effects can already be seen in the costs for raw materials used to process steel like coking coal, said energy research consultancy Wood Mackenzie.

Coking coal prices are surging and are about 450 yuan per ton higher than last year, according to Zhilu Wang, research associate at the firm.

“This is due to the restrictions on inter-provincial transportation in Hebei provinces which has resulted in the increase of transportation fee,” said Wang.

While this could in turn support steel prices, Wang predicted it could mildly weaken overall as traders stock less of the commodity due to the Covid uncertainty.

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China loan prime rates, coronavirus, currencies

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SINGAPORE — Stocks in Japan were set to trade higher at the open as investors in Asia-Pacific wait for the release of China’s latest benchmark lending rate.

Futures pointed to a higher open for Japanese stocks. The Nikkei futures contract in Chicago was at 28,755 while its counterpart in Osaka was at 28,700. That compared against the Nikkei 225’s last close at 28,633.46.

Meanwhile, shares in Australia edged higher in early trading, with the S&P/ASX 200 up about 0.5%.

In Southeast Asia, stocks in Malaysia will be closely watched following reports that almost all states in the country will be placed under Movement Control Order from Friday as the government seeks to curb the spread of the coronavirus.

Investor focus on Wednesday will likely be on China’s benchmark lending rate, expected to be out at around 9:30 a.m. HK/SIN. A majority of traders and analysts in a snap Reuters poll predict no change to either the one-year loan prime rate (LPR) or the five-year LPR, which were last sitting at 3.85% and 4.65%, respectively.

Currencies

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 90.476 following an earlier high above 90.7.

The Japanese yen traded at 103.87 per dollar, having weakened from levels below 103.8 against the greenback yesterday. The Australian dollar changed hands at $0.7706, still off levels above $0.775 seen last week.

Here’s a look at what’s on tap:

  • China: One year and five year loan prime rates at 9:30 a.m. HK/SIN

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From Jeep to Maserati, Stellantis to rollout 10 new EV models in 2021

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