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Morgan Stanley analysts said in their Q1 bank earnings preview on Wednesday that it is “too early to go large-cap banks.”
They reaffirmed the firm’s stance that high inflation coupled with quantitative tightening is a tough environment for banks, with inflation driving up loan growth and QT shrinking deposits.
“Can you imagine pitching a levered bond fund that grows 10% a year but has 3% of its funding disappear every year that you have to scramble to replace?” they asked. “That’s what the banks were dealing with even before SIVB failed, with loans growing 10% and deposits shrinking 3%.”
“Layer on a few bank failures, increased demand for granular consumer deposits, increased liquidity regulation across a wider set of banks, higher capital for GSIBs with Basel endgame coming, tighter lending standards, rising credit losses…. and the squeeze on the banking industry increases,” said the analysts. “Every income statement line item is in flux, and the degree of confidence our forecast is lower as the probability of a sharper slowdown increases.”
Heading into Q1 earnings, they revealed that the firm’s most preferred banks are JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), and Regions Financial (NYSE:RF).
They model JPM delivering 340bps of positive operating leverage in 2023, with revenues up 11% and expenses up 8% y/y. For Wells Fargo, Morgan Stanley believes that as the environment turns more uncertain, WFC’s capital position stands out among its peers, while they expect the value of RF’s deposit base to “come through as a key driver of NII performance this year.”
