Wall Street Firm Abruptly Upgrades JPMorgan and Morgan Stanley, Says Upside Scenario Now Base Case for Big Banks

Boutique investment bank KBW believes JPMorgan Chase and Morgan Stanley are primed to witness higher prices as conditions conspire to favor large US banks

In a new interview on CNBC Television, KBW head of US bank research Chris McGratty says the firm has upgraded its ratings for JPMorgan and Morgan Stanley to outperform, with price targets of $327 for JPM and $160 for MS.

According to McGratty, large banks are poised to benefit from easing regulations due to their scale-driven efficiency and consistent performance.

“You are seeing a re-rating. This re-rating has been occurring for the past couple of months. Deregulation is being built into earnings estimate upside scenarios, blue skies, and the reality is that the upside scenario is becoming the base-case scenario.

So you’re seeing the universal, the largest six banks, lead the charge. We’ve gotten a lot of positive news on deregulation, and that’s one of three themes with this launch is deregulation. The other two themes are scale and consistency, and any way you check it, the largest banks have all three under the relative winners.” 

As of Friday’s close, JPM is trading at $286 and MS is worth $142.

Another banking giant on McGratty’s radar is Citi (C). McGratty says Citi may be the most undervalued stock among the group based on its return on tangible common equity (ROTCE), a financial metric that measures how efficiently a bank is generating profits for its common shareholders.

“If you think about their guide, their 10-11% ROTCE guide for next year, they took that down earlier this year. So the bar has been lowered. But if you look at where expectations are, we’re in the low to mid-9%. So there’s a big gap between low 9% and 10 to 11%. So if they can get that right, it’s the cheapest stock in the group. 

They’ve got a buyback catalyst. It’s very accretive when you can buy your stock back below 10 to a book value. And so this deregulatory environment for Citi is hugely helpful. 

The reason the ROE (return on equity) is so low is that the expenses have had to play catch-up. That investment phase is done, and so what the company is doing now is they are generating revenue. They are generating positive operating leverage across their businesses, and if they can get the macro to settle in a bit, this is a company I think we can re-rate quite a bit.”

KBW is a New York-based firm known for its deep expertise in financials and bank stock coverage.

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