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The Ratings Game: JPMorgan Chase upgraded by two notches by Morgan Stanley; view cut on State Street and BNY Mellon

Morgan Stanley analyst Betsy Graseck on Tuesday upgraded JPMorgan Chase & Co. to overweight from underweight on the bank’s positive moves on operating leverage, progress on capital requirements, and market share gains by its consumer banking franchise.

Graseck said these attributes offered by JPMorgan Chase

justified skipping past an upgrade to equal weight to overweight. She also hiked her JPMorgan Chase price target to $153 a share from $126 a share.

JPMorgan Chase stock traded about flat on Tuesday as it bucked a sell-off in the broad equities market. JPMorgan Chase is a component of the Dow Jones Industrial Average
which fell 0.7% at midday.

Graseck said JPMorgan’s negative operating leverage in 2022 had been a key reason for its previous underweight rating.

But she’s now modeling 110 basis points (bps), or 1.1% of positive operating leverage in 2023, with a 10% rise in revenue and a 9% increase in expenses for JPMorgan.

“While 110bps isn’t an eye-popping number, it’s a significant inflection from the last two years of negative operating leverage at JPM,” Graseck said. “In addition, we think risks around operating leverage skew to the upside as JPM has already provided guidance on 2023 net interest income of about $74 billion and our 9% expense growth estimate feels conservative.”

JPMorgan Chase has also seen progress on achieving its higher Common Equity Tier 1 ratio requirements.

JPMorgan Chase’s retail banking unit continues to take deposit share across the country, with median deposit share up 1.5% across the Top 50 U.S markets over the last five years . This reflects JPM’s construction of 500 new branches since 2017. Twenty percent of its branch network is less than ten years old.

Overall, the banking sector has been able to charge higher interest for loans and thereby boost its net interest margins, but expenses continue to rise quickly as well.

“While loan growth is at record highs, funding costs are increasing at the fastest pace in history and capital is tight,” she said. “Bankers are tightening loan standards and widening spreads to make it worth their effort to fund new loans.”

Against this backdrop, Graseck cut her ratings on State Street Corp.

and Bank of New York Mellon Corp,

to equal weight from overweight. She kept State Street’s price target at $86 a share and maintained BNY Mellon’s price target of $42 a share.

State Street’s 8% rally on the day it pulled out of its deal to buy a unit of Brown Brothers Harriman means the stock is now fairly valued at current levels, she said. State Street is instead planning to buy back $5 billion in stock.

“With this catalyst in the rear-view mirror, we are moving to the sidelines,” she said. “The biggest risk to the stock from here is accelerated deposit outflows.”

BNY Mellon also faces shrinking deposits, she said.

“The risk is that outflows persist for longer during quantitative tightening given BK’s skew toward fixed income asset manager clients and its key position as Fed clearing agent,” she said.

She sees BNY Mellon will generate flat net interest income in 2024, compared to 2% median growth across U.S. banks.

Graseck also reiterated outperform ratings on Wells Fargo & Co.

and Regions Financial Corp.

Wells Fargo offers excess capital and liquidity and positive operating leverage, while Regions Financial offers excess liquidity and positive operating leverage, she said.

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