Top Large Cap Banks for 2012, According to Morgan Stanley: Part II

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Includes: C, DFS, GS, JPM, MS, NTRS, V
by: Insider Monkey

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Morgan Stanley has published a report entitled “Large Cap Banks” on November 28, 2011. They have tried to identify banks that can get larger C&I share, are less exposed to Eurozone, and have higher dividend yields. Rich trust banks with low earnings per share growth and fewer catalysts have been given an underweight rating. We will discuss their analysis in a series of three articles. This is the second of the three (see the first article here).

Citigroup, Inc. (NYSE:C) has been given an equal-weight rating by Morgan Stanley due to a weak capital market environment, exposures to the European market, and slowdown in emerging markets. The declining credit costs are expected to increase revenue for the company. Shares of Citigroup are currently trading at $27.4 per share and are expected to go north of $30. If the loan pool runoff is achieved faster and there is an increase in non-US growth, a target price of $40 may be achieved by the end of 2012. This bullish scenario assumes that the company is able to achieve and maintain a price to book ratio of 0.7. Activist hedge fund manager Bill Ackman is very bullish about Citigroup. Pershing Square had nearly $700 million in C at the end of September.

Discover Financial (NYSE:DFS) has been given an equal-weight rating by Morgan Stanley. The company has improved its credit quality which will result in earnings growth. The charge-offs have been slowly decreasing. Net charge-offs are estimated to be around 3.2% by 2012. Discover has recently announced that it will use around $1 billion to buy back shares. The company is also trying to diversify its funding sources. Its shares have been trading at around $24 per share and are expected to increase to $26 by the end of next year. If Discover is able to increase its loan portfolio and decrease credit losses to 3%, Morgan Stanley believes that a price to earnings ratio of 11x would mean its shares to trade at $34. Visa Incorporated (NYSE:V) is a large competitor of Discover Financial and has a trailing PE ratio of 19.

Goldman Sachs Group (NYSE:GS) has been given an equal-weight rating by Morgan Stanley. The presence of industry headwinds has put a ceiling on return on earnings. Morgan Stanley also thinks that the company has high near-term earnings risk. However, if the comp and non-comp ratio decreases by even 1 percentage point, return on assets will increase by 3 basis points. Shares of the company are currently trading around $93 per share and are expected to reach $113 by the end of 2012. In the light of an accelerating U.S. recovery and the ability of the company to maintain a price to book ratio of 0.89x, share price is expected to reach $131. Boykin Curry is extremely bullish about GS, expecting the stock reach $150 in 2-3 years.

JPMorgan Chase (NYSE:JPM) has been given an overweight rating due to its increasing market share, its focus in efficiency, and declining costs of mortgage foreclosure. In light of a decrease in regulations, lower market volatility, and commercial loan growth, the company is expected to perform significantly better. Shares of the company are currently trading at $33.50 and are expected to reach a price target of $40. The company has a dividend yield of 3.1%. If the U.S. economy recovers faster than expected, credit environment improves, and the company maintains a price to book ratio of 1.3x, its stock price may reach $49. Lansdowne Partners had nearly $700 million invested in JPM at the end of September.

Northern Trust Corp. (NASDAQ:NTRS) has been given an underweight rating by Morgan Stanley because of the low Fed rates which are adversely affecting the company. Shares of the company are currently trading at $40.6 per share and are expected to go north of $41. In case of a sharp economic recovery and the ability of the company to maintain a price to earnings ratio of 10.7x, share price may rise further to $46 per share.

Disclosure: I am long C, MS.

Continue to Part III >>