JPMorgan Will Turn Around Before Morgan Stanley: Goldman
The analysts added JPMorgan to their "conviction" buy list while downgrading Morgan Stanley to neutral.
Both stocks have underperformed the banking sector significantly in the last couple of months for specific reasons. JPMorgan is down 15% since the disclosure of its $2 billion hedging loss, while Morgan Stanley has shed 25% since the first quarter earnings on worries about the Moody's downgrade.
While both stocks are attractively valued, Goldman Sachs sees more upside for JPMorgan. CEO Jamie Dimon's testimony that the second quarter was expected to be "solidly profitable" and that the losses were an "isolated incident" have removed some of the worst-case scenarios priced into shares, the team led by Richard Ramsden said in the report.
Meanwhile, the long-term story for the bank remains intact, given that the CIO unit contributed only 5% to overall earnings per share.
Moreover, the resumption of buybacks could be a catalyst for the shares. JPMorgan suspended its $15 billion buyback program in light of the recent losses and there have been some fears that the bank's 3.4% dividend yield would be in jeopardy.
But the analysts noted that earnings per share would "have to fall 50% from our forecasts before there is a risk to dividend". Also, the bank could re-initate its buyback program in 2012 if it makes progress in exiting its CIO positions, which would be another positive catalyst, though it may still need regulatory approval.
The analysts maintained their price target of $42 for JPMorgan, even as they lowered the second-quarter earnings estimate to 60 cents from 75 cents to reflect a quicker recognition of the CIO trading loss.
Goldman analysts are not so positive about their rival Morgan Stanley. "While too soon to tell how counterparties will react to a new capital markets rating distribution post-Moody's this cycle has proven that banks with the largest increase in funding spreads have generally lost fixed-income trading market share. In addition, with a number of global macro uncertainties likely to weigh on capital markets activity in the foreseeable future, MS has outsized exposure here as well.," the report said.
The analysts lowered the price target on the investment bank to $16 from $20 earlier.
-- Written by Shanthi Bharatwaj from New York