So far, the conventional wisdom is that Morgan Stanley escaped a potential time bomb with the release of new bank ratings from Moody’s last week. Moody’s cut Morgan Stanley’s (MS) credit rating by two notches, after investors had fretted over the possibility of a three-notch downgrade. But the drop is still damaging, notes Goldman Sachs analyst Richard Ramsden in downgrading MS shares to Neutral from Buy. Morgan Stanley had been on Goldman’s conviction list.
“Longer term, while too soon to tell how counterparties will react to a new capital market ratings distribution post-Moody�s, this cycle has proven that banks with the largest increase in funding spreads have lost trading market share,” Ramsden wrote.
In Morgan Stanley’s place, Ramsden elevated JPMorgan Chase (JPM) to the conviction list. CEO Jamie Dimon has performed well in front of Congress in recent weeks, and the problems in the firm’s chief investment office appear to be “isolated.”
“We believe the 15% decline in JPM shares has been drastic relative to 1) the 5% average EPS contribution of the CIO unit, 2) near-term returns even with stressed hedge losses, and 3) one of the lowest P/E and highest dividend yields in banking despite one of the highest and consistent return profiles. We estimate EPS could fall 50% from our forecasts before there is risk to the dividend and that JPM could exceed 9% B3 T1C by mid-2013. As such, buybacks could be re-initiated in 2012 which would likely further support shares.”
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