'The future’s so bright': Large banks upgraded at Morgan Stanley

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'The future’s so bright': Large banks upgraded at Morgan Stanley
Credit: © Reuters.

Morgan Stanley equity analysts have adopted a bullish stance on major US banks, anticipating that forthcoming regulatory adjustments concerning higher capital requirements will be less burdensome than initially proposed.

This expected leniency could pave the way for an uptick in stock buybacks, analysts wrote in a note.

“Reading the tea leaves, it looks like Basel Endgame will be lightened up. This opens the door for a significant increase in buybacks, as large cap banks have the highest excess capital levels ever,” analysts said.

The upgrade by Morgan Stanley analysts is based on three key reasons:

  1. The risks associated with the “Basel Endgame,” a set of international banking regulations, are becoming clearer.
  2. The potential for a substantial increase in buybacks is emerging, particularly as large banks currently hold the highest levels of excess capital ever recorded, and this is in a context where loan growth is relatively sluggish.
  3. There is a growing confidence in a rebound within the capital markets sector.

On the individual bank stocks level, Bank of America (NYSE: BAC ) is upgraded to Overweight while Citigroup (C) is double upgraded from Underweight.

This is because analysts argue that Citigroup is the “biggest beneficiary from incremental buybacks.”

“Buybacks at roughly half of book value are a very accretive financial transaction,” the analysts added.

Similarly, Goldman Sachs (NYSE: GS ) stock is raised to Overweight, while Bank of New York Mellon (NYSE: BK ) is lifted to Equal Weight. On the other hand, Northern Trust (NASDAQ: NTRS ) is cut to Underweight on valuation concerns.

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