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

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Morgan Stanley on Monday raised the ratings of five banks and sharply commented on others, saying the sector is likely to outperform when interest rates rise.

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Although panic around the Omicron version has pushed bank stock prices down in recent sessions, Morgan Stanley analyst Betsy Grasek is advising clients to “buy the dip” in bank stocks.

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“We’ve seen this movie before,” Gresek said. “Virus hits, scientists make vaccine to address virus. If Omicron needs a new vaccine, Pfizer and Moderna say it’s 1Q production, 2Q distribution. Worst-case scenario, just from an economic standpoint, we think it fuels a quarter of slower growth, with no lockdown in the US.

He said banks outperformed the S&P 500 SPX.
+0.99%
Higher than any other sector during the period of rising rates. They are also the only sectors that outperform during periods of rising real yields. Broadly speaking, an interest rake hike of 25 basis points by the Fed would increase earnings per share to banks by about 1.5%, she said.

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

SPDR S&P Bank Exchange-Traded Fund KBE,
+3.08%
was up 3.1% in morning trading on Monday. The ETF has lost 4.3 percent in the past months, while the S&P 500 has lost 2.6 percent.

Grasek highlighted the top six stocks as: Ally Financial Inc. Associate,
+2.73%,
Alliance Data Systems Corp. ADS,
+4.31%,
Capital One Financial Corporation CoF,
+3.55%,
Sector Financial Corp., RF,
+3.36%,
State Street Corporation STT,
+4.07%,
synchronous financial syf,
+3.51%
and Wells Fargo & Company WFC,
+4.08%,

It upgraded Wells Fargo from underweight to equal weight with a $61 price target, and Goldman Sachs Group Inc. Extended my view on GS,
+2.21%
From underweight to equal-weight, with a price target of $479.

Meanwhile, Grasek acquired Citigroup Inc. cut your rating on C,
+1.01%
From overweight to under-weight, with a price target of $82, on lack of a catalyst for the stock. He also cut the Bank of New York Mellon Corp. BK,
+1.59%
Valuation and low credit risk at equal weight with a price target of $59, and PNC Financial Services Group Inc. PNC,
+2.05%
For a weight less than par, with a price target of $209.

For the Omicron bounceback, Morgan Stanley favored Synchronous Financials and Capital One, as they are trading close to their price-to-earnings ratios, as loan growth is expected, she said.

For rate hikes, the “clear winners” are Wells Fargo and State Street, “given their rate sensitivity and attractive valuations.” She sees a potential share price up 28% for Wells Fargo and 42% for State Street.

As for commercial credit growth, Morgan Stanley highlights regional financials, which have a major exposure to commercial and industrial lending.

“While significant risks remain around the time of asset cap removal and further regulatory action, the potential for higher rates soon outweighs the risk-
Reward more favorably,” Gresek said of Wells Fargo.

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

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