KBW Upgrades JPMorgan Chase and Morgan Stanley to Outperform on Deregulation and Efficiency

KBW, a boutique investment bank, has unexpectedly upgraded its ratings for JPMorgan Chase and Morgan Stanley, indicating a bullish outlook for these major US banks. The firm's head of US bank research, Chris McGratty, stated in an interview that KBW has raised its ratings for JPMorgan and Morgan Stanley to outperform, with price targets of $327 for JPMorgan and $160 for Morgan Stanley.

McGratty attributed this upgrade to several factors, including easing regulations, scale-driven efficiency, and consistent performance of large banks. He noted that the re-rating of these banks has been occurring over the past few months, with deregulation being a significant driver. McGratty believes that the previously optimistic scenario for these banks is now the base case, indicating a more positive outlook for their future performance.

According to McGratty, the largest six banks in the US are leading the charge in this re-rating, driven by positive news on deregulation, scale, and consistency. He highlighted that JPMorgan and Morgan Stanley possess all three of these qualities, making them relative winners in the current environment. As of Friday’s close, JPMorgan was trading at $286 and Morgan Stanley at $142.

Another banking giant on McGratty’s radar is Citi. He suggested that Citi may be the most undervalued stock among the group based on its return on tangible common equity (ROTCE). McGratty explained that Citi's guide for next year is a 10-11% ROTCE, which was lowered earlier this year. However, current expectations are in the low to mid-9%, creating a significant gap. If Citi can achieve its ROTCE guide, it could be the cheapest stock in the group. Additionally, Citi has a buyback catalyst that is very accretive when the stock can be bought back below 10 times book value. The deregulatory environment is seen as hugely helpful for Citi, as the company is now generating revenue and positive operating leverage across its businesses.

KBW is recognized for its deep expertise in financials and bank stock coverage. The firm's upgrade of JPMorgan and Morgan Stanley reflects a growing confidence in the financial health and prospects of these major institutions, driven by their strong fundamentals and strategic initiatives. As the economic landscape continues to evolve, JPMorgan and Morgan Stanley are well-positioned to capitalize on emerging opportunities and deliver value to their stakeholders.