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In a note to clients Tuesday, Morgan Stanley analysts said it’s not time to be long Large Cap Banks yet, with the firm upgrading JPMorgan (NYSE:JPM) to Overweight from Underweight and downgrading State Street (NYSE:STT) to Equal-Weight from Overweight and Bank of New York (NYSE:BK) to Underweight from Equal-Weight.
The analysts explained that the Fed rate hikes might be approaching the late cycle, but “bank credit is early cycle and NIMs are mid-cycle. The longer the Fed keeps rates high, the tougher for banks and borrowers.”
“NIMs are about to turn lower. While loan growth is at record highs, funding costs are increasing at the fastest pace in history, and capital is tight. Bankers are tightening loan standards and widening spreads to make it worth their effort to fund new loans,” the analysts explained.
Morgan Stanley double upgraded JPMorgan based on its operating leverage inflecting positively, Consumer & Community Bank taking market share, and progress on higher CET1 ratio regulatory requirements.
State Street was lowered as the firm’s Overweight catalyst played out last Wednesday after the bank terminated its acquisition of BBH Investor Services, resulting in an 8% relief rally. The Bank of New York Mellon downgrade was said to reflect the risk that deposit outflows persist for longer during QT given the bank’s “skew toward fixed income asset manager clients and its key position as Fed clearing agent.”
Commenting on the Fed, the analysts stated that it’s not enough for the Fed to just slow or stop hiking rates, it “has to end QT to get more positive on the banks.”
“Our economist’s outlook calls for Fed Funds to get to 4.675% in February and then stay there until December 2023. That’s a full year of higher rates, coupled with a full year of QT, which our economists don’t have ending until 2Q24,” they added.
