Morgan Stanley upgrades Bank of America, Goldman Sachs and Citi on 'lightened up' Basel III capital requirements

By Steve Gelsi

Analyst Betsy Graseck is 'back & bullish' on banks on sunnier prospects for a 'significant increase in buybacks'

Morgan Stanley analyst Betsy Graseck on Tuesday upgraded Bank of America Corp., Goldman Sachs Group Inc., Citigroup Inc. and Bank of New York Mellon Corp. on optimism around pared-back capital requirements now under study by the the U.S. Federal Reserve.

Morgan Stanley also said the entire group of big-bank stocks look attractive, and lifted price targets by a median of 16% across the board on 12 of them.

If banks are not required to hold quite as much capital as in the initial Basel III endgame proposal by regulators, Graseck said it's likely banks may boost moves to return money to shareholders.

"Reading the tea leaves, it looks like Basel endgame will be lightened up," Graseck said in a research note. "This opens the door for a significant increase in buybacks, as large-cap banks have the highest excess capital levels ever."

On another front that will benefit the big banks, capital markets are rebounding as the IPO market comes back to life and M&A deals resurface.

Morgan Stanley upgraded Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) to overweight from equal-weight. Bank of America's price target was increased to $41 from $32, while Goldman's price target was lifted to $449 from $333.

Morgan Stanley lifted its rating on Citigroup Inc. (C) by two notches to overweight from underweight and boosted its target price to $65 from $46.

"Biggest beneficiary from incremental buybacks is Citigroup as buybacks at roughly half of book value are a very accretive financial transaction," Graseck said.

Also read: Fed's Michelle Bowman talks up compromise as comments on bank capital requirements roll in

Bank of New York Mellon (BK) drew an upgrade to equal-weight from underweight, with a new price target of $62, up from $52.

The bank also reiterated an overweight rating on JPMorgan Chase & Co. (JPM) and lifted its price target to $221 from $191.

It also kept an overweight rating on Wells Fargo & Co. (WFC) and lifted its price target for the stock to $63 from $54.

Regions Financial Corp. (RF) was kept at overweight, with a price target boost to $27 from $21.

Northern Trust Corp. (NTRS) was downgraded to underweight from equal-weight, with a price target increase to $86 from $82.

Graseck's optimism about a paring-back of the controversial Basel III endgame proposal comes from the "vast majority" of big-bank management teams that have "publicly suggested the rules will be lightened.

She said she's baking in only half of her original Basel III endgame-related projections for risk-weighted asset inflation.

"We're anticipating that a final rule set will better align with global standards, driving a lower risk-weighted assets uplift than banks originally disclosed," Graseck said.

The Morgan Stanley upgrade comes after a tough year for bank stocks after the demise of Silicon Valley Bank and two other lenders as well as a rapid rise in interest rates that chilled demand for loans.

Bank stocks have been gaining traction of late, however, with the Financial Select SPDR Fund XLF up 3.1% in 2024, compared to a 3.3% rise by the S&P 500 SPX.

Also read: Bank complaints about higher capital requirements may be overblown, finance professor says

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-Steve Gelsi

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01-30-24 0923ET

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