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Dec. 6, 2021, 11:38 a.m. EST

Morgan Stanley boosts ratings on banks ahead of expected interest rate hikes

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By Steve Gelsi

Morgan Stanley on Monday boosted ratings on two banks and issued bullish comments on others, saying the sector was the most likely to outperform when interest rates rise.

While jitters around the omicron variant have pushed bank stock prices down in recent sessions, Morgan Stanley analyst Betsy Graseck advised clients to “buy the dip” in bank stocks.

“We’ve seen this movie before,” Graseck said. “Virus hits, scientists create vaccine to address virus. If omicron needs a new vaccine, Pfizer and Moderna say it is 1Q production, 2Q distribution. At worst, from an economic perspective only, we think this drives one quarter of slower growth, with no lockdowns in the U.S.”

She said banks have outperformed the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.89% more than any other sector during periods of rising rates. They’re also the only sector that outperforms during periods of rising real yields. Roughly, a 25 basis point interest rake hike by the Fed will add about 1.5% to earnings per share to banks, she said.

And recent indications from the Fed suggest more than one quarter-point rate hike may be expected in 2022. Read more about rate expectations in MarketWatch’s “The Fed” column .

The SPDR S&P Bank exchange-traded fund /zigman2/quotes/201006419/composite KBE -1.99% was up 3.1% in morning trading Monday. The ETF has lost 4.3% over the past months, while the S&P 500 has slipped 2.6%.

Graseck highlighted as top plays six stocks: Ally Financial Inc. /zigman2/quotes/206227672/composite ALLY -3.92% , Alliance Data Systems Corp. /zigman2/quotes/205162001/composite ADS -1.42% , Capital One Financial Corp. /zigman2/quotes/204480509/composite COF -2.50% , Regions Financial Corp., /zigman2/quotes/202396577/composite RF -1.43% , State Street Corp. /zigman2/quotes/209758976/composite STT -3.42% , Synchrony Financial /zigman2/quotes/203661733/composite SYF -1.64% and Wells Fargo & Co. /zigman2/quotes/203790192/composite WFC -2.42% .

She upgraded Wells Fargo to equal-weight from underweight, with a $61 price target, and boosted its view on Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS -1.20% to equal-weight from underweight with a price target of $479.

Meanwhile, Graseck trimmed her rating on Citigroup Inc. /zigman2/quotes/207741460/composite C -1.85% to equal-weight from overweight, with a price target of $82, on a lack of catalysts for the stock. She also cut Bank of New York Mellon Corp. /zigman2/quotes/200171276/composite BK -4.57% to equal-weight with a price target of $59, on valuation and low loan exposure, and PNC Financial Services Group Inc. /zigman2/quotes/203416310/composite PNC -2.87% to underweight from equal-weight, with a price target of $209.

For the omicron bounceback, Morgan Stanley favors Synchrony Financial and Capital One, because they’re trading close to their price-to-earnings ratio lows, just as loan growth is expected to take off, she said.

For rate hikes, the “clear winners” are Wells Fargo and State Street, “given their rate sensitivities and attractive valuation.” She sees potential share price upside of 28% for Wells Fargo and 42% upside for State Street.

For commercial loan growth, Morgan Stanley spotlighted Regions Financial, which has a big exposure to commercial and industrial lending.

“While significant risks around the timing of asset cap removal and further regulatory action remain, probability of higher rates sooner skews the risk-reward more favorably,” Graseck said about Wells Fargo.

Shares of Wells Fargo jumped 4% on Monday. The stock is up 65% this year, compared with a gain of 22.1% by the S&P 500. In other Monday trades, Goldman Sachs rose 2.5% and Citigroup rose 0.7% and BNY Mellon added 1.5% and PNC advanced by 1.7%.

/zigman2/quotes/210599714/realtime
US : S&P US
4,397.94
-84.79 -1.89%
Volume: 3.20B
Jan. 21, 2022 4:52p
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/zigman2/quotes/201006419/composite
US : U.S.: NYSE Arca
$ 55.12
-1.12 -1.99%
Volume: 5.75M
Jan. 21, 2022 4:00p
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/zigman2/quotes/206227672/composite
US : U.S.: NYSE
$ 47.06
-1.92 -3.92%
Volume: 7.04M
Jan. 21, 2022 4:00p
P/E Ratio
5.67
Dividend Yield
2.55%
Market Cap
$17.15 billion
Rev. per Employee
$1.11M
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/zigman2/quotes/205162001/composite
US : U.S.: NYSE
$ 64.61
-0.93 -1.42%
Volume: 797,505
Jan. 21, 2022 4:00p
P/E Ratio
4.05
Dividend Yield
1.30%
Market Cap
$3.22 billion
Rev. per Employee
$538,312
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/zigman2/quotes/204480509/composite
US : U.S.: NYSE
$ 146.52
-3.75 -2.50%
Volume: 2.73M
Jan. 21, 2022 4:00p
P/E Ratio
5.47
Dividend Yield
1.64%
Market Cap
$62.36 billion
Rev. per Employee
$605,271
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/zigman2/quotes/202396577/composite
US : U.S.: NYSE
$ 22.10
-0.32 -1.43%
Volume: 16.73M
Jan. 21, 2022 4:00p
P/E Ratio
8.88
Dividend Yield
3.08%
Market Cap
$21.07 billion
Rev. per Employee
$342,111
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/zigman2/quotes/209758976/composite
US : U.S.: NYSE
$ 90.99
-3.22 -3.42%
Volume: 3.26M
Jan. 21, 2022 4:03p
P/E Ratio
12.66
Dividend Yield
2.51%
Market Cap
$33.30 billion
Rev. per Employee
$305,028
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/zigman2/quotes/203661733/composite
US : U.S.: NYSE
$ 44.42
-0.74 -1.64%
Volume: 5.80M
Jan. 21, 2022 4:00p
P/E Ratio
6.27
Dividend Yield
1.98%
Market Cap
$24.31 billion
Rev. per Employee
$684,788
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/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 53.67
-1.33 -2.42%
Volume: 38.36M
Jan. 21, 2022 4:02p
P/E Ratio
10.78
Dividend Yield
1.49%
Market Cap
$208.55 billion
Rev. per Employee
$306,881
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/zigman2/quotes/209237603/composite
US : U.S.: NYSE
$ 343.91
-4.19 -1.20%
Volume: 4.90M
Jan. 21, 2022 4:00p
P/E Ratio
5.79
Dividend Yield
2.33%
Market Cap
$115.14 billion
Rev. per Employee
$1.60M
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 63.27
-1.19 -1.85%
Volume: 28.64M
Jan. 21, 2022 4:02p
P/E Ratio
6.27
Dividend Yield
3.22%
Market Cap
$125.55 billion
Rev. per Employee
$381,305
loading...
/zigman2/quotes/200171276/composite
US : U.S.: NYSE
$ 57.18
-2.74 -4.57%
Volume: 5.98M
Jan. 21, 2022 4:02p
P/E Ratio
13.78
Dividend Yield
2.38%
Market Cap
$47.22 billion
Rev. per Employee
$332,763
loading...
/zigman2/quotes/203416310/composite
US : U.S.: NYSE
$ 200.96
-5.94 -2.87%
Volume: 3.02M
Jan. 21, 2022 4:00p
P/E Ratio
15.82
Dividend Yield
2.49%
Market Cap
$84.40 billion
Rev. per Employee
$384,299
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