Banks have entered 2019 in good spirits.
The KBE bank ETF rallied more than 1 percent on Wednesday, a good start after closing out 2018 with its worst losses in seven years.
While the rest of the group rallies, Dick Bove of Rafferty Capital Markets has a warning on one industry leader.
“I don’t want to touch Goldman Sachs,” Bove said on CNBC’s “Trading Nation” on Wednesday. “People really don’t understand what the issue is concerning Goldman Sachs. It’s that they were involved in this huge scandal related to Malaysia. It’s the fact that their compliance operations internally seem to have broken down.”
Goldman Sachs has been wrapped up in a scandal involving Malaysian state investment fund 1MDB, for which the bank had orchestrated three bond deals in 2012 and 2013 that raised $6.5 billion. The 1MDB fund has been mired in impropriety involving allegations of corruption and money laundering. The Malaysian government has since asked Goldman for $7.5 billion in reparations.
A Goldman Sachs spokesman did not immediately return an after-hours message left by CNBC on Thursday. The firm has denied wrongdoing, and accuses members of the former Malaysian government and 1MDB of lying to the firm about the use of proceeds from the transactions.
Bove says Goldman’s involvement with the scandal-ridden fund either uncovers ineptitude at the top of the company or a failure of its systems.
“In order for some entity to give $6 billion over three issuances, the highest level of the company must agree to it,” Bove said. “The net effect is that the company cannot say that they did not approve this at every level. But then what they can say is we were victimized and if you were victimized it’s because your systems are no good.”
That Catch-22 will lead to a regulatory hangover that could weigh on Goldman Sachs for years and cost them millions, says Bove.
“The Fed comes in and it says, ‘OK, what we need to do is take a look at all of your internal systems — everything from human resources, all the way out to risk management,'” Bove said. “It costs tens of millions of dollars, hundreds of millions of dollars to do that. And it takes two to three years because it isn’t a simple run-through.”
As for the rest of financials, Bove says heavy losses in 2018 have made for more attractive valuations.”I don’t think anyone could make a case that bank stocks are expensive and I definitely don’t think that they can make the case that there is some weakness that’s going to show up from operating earnings,” he said.
However, Bove remains in wait-and-see mode until he can dig into the major banks’ loan portfolios when they report in coming weeks. Citigroup, JPMorgan, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley kick off the reporting season with their earnings reports in the week beginning Jan. 14.
