Morgan Stanley on Monday cut its rating on Citigroup Inc. and lifted its view on Bank of America Corp., as it assessed the impact of the Ukraine war on big names from the financial sector.
“War changes everything,” wrote Morgan Stanley analyst Betsy Graseck in a note to clients. “Fatter tail risks require more capital and liquidity.”
This dynamic may cause banks to cut back on their stock repurchases, she said.
Meanwhile, high inflation will also challenge consumers from the lowest income bracket. Morgan Stanley is already seeing “the beginnings of a cycle” in subprime auto and other lower quality lending categories, Graseck wrote.
Graseck cut her view view on Citigroup
to underweight from equal weight and reduced its price target to $60 a share from $75.
Deglobalization will pressure revenue at Citi and slow its efforts to exit markets in Mexico and Asia and impact valuation, she wrote.
Citigroup’s 2023 earnings estimate was lowered to $7.48 a share from $7.84 a share. On average, Wall Street analysts expect Citigroup to earn $7.79 a share in 2023, according to a FactSet survey.
Shares of Citigroup fell 2.2% in midday trading Monday. The stock was down 8.0% so far this year, compared to a loss of 5.2% by the S&P 500 index
and a slim loss of 0.2% by the Financial Select Sector SPDR ETF
Bank of America (BAC), meanwhile, drew an upgrade to equal weight from underweight and a price target reduction to $49 a share from $51 a share. But the stock
still declined 2.0% in midday trading.
“BAC’s long-held strategy of responsible growth comes with tighter underwriting
standards and strong credit quality, as evidenced by their low loan-loss ratios under the severely adverse case in the annual Fed stress test,” Graseck wrote.
Bank of America is also poised to benefit as the Federal Reserve hikes the cost of lending. Morgan Stanley expects six rate hikes in 2022 and four in 2023. These moves will drive an expected 16% compound annual growth rate in Bank of America’s net interest income over the next two years.
“BAC is also one of the most rate sensitive names in the group, with a 100 basis point parallel shift in the yield curve driving an incremental 20%+ to earnings per share,” Graseck wrote. “BAC’s skew to primary/non-interest bearing consumer deposit accounts means that they should have a relatively lower deposit beta as rates move higher.”
Morgan Stanley cut its 2023 earnings forecast for Bank of America to $4.09 a share from $4.24 a share. Analysts currently expect Bank of America to earn $3.84 a share in 2023, according to a FactSet survey.
Shares of Bank of America fell 1.5% on Monday. The stock is now down 3.2% in 2022.
Morgan Stanley also re-rated five other names in the financial sector including a downgrade of Alliance Data Systems Corp.
to equal weight from overweight and a price target reduction to $67 a share from $104 a share, and an upgrade of Bank of New York Mellon Corp.
to equal weight from underweight and a price target change to $58 from $65.
Morgan Stanley cut its rating on Synchrony Financial
to equal weight from overweight and trimmed its price target to $40 a share from $56 and also downgraded shares of Fifth Third Bancorp
to equal weight from overweight, while reducing its price target to $50 from $56 a share.
In addition, analysts changed their rating on M&T Bank Corp.
to underweight from equal weight and cut their price target on the stock to $179 a share from $185 a share.