8 Post-Downgrade Bank Stock Bargains

Under Basel III, allowable Tier 1 capital will be reduced, while risk-weighted assets will increase, pushing the Tier 1 common ratio down, but banks have until January 2019 to achieve full compliance with the new capital standards, and Morgan Stanley estimated in its first-quarter 10-Q filing that "its pro forma Tier 1 common capital ratio under Basel III will be in a range between 8% and 10% by the end of 2012." With a minimum Tier 1 common equity ratio requirement of 7.5%, plus a possible 2.5% capital buffer required as a "systemically important financial institution," Morgan Stanley could conceivably comply with the enhanced capital requirements by the end of this year, or five-years before the fully phase-in of Basel III requirements.

Under new regulatory guidance for "advanced banks," Citigroup analyst Keith Horowitz on Thursday estimated that Morgan Stanley's pro forma Basel III Tier 1 common equity ratio would be 8.5%, which is within the range of 8% to 9% that Morgan Stanley CEO James Gorman recently estimated. That's considerably higher than Citi's estimates for JPMorgan Chase , Goldman Sachs , Bank of America and Wells Fargo , although, of course, several of those names have been posting higher recent returns on equity than Morgan Stanley.

JPMorgan Chase analyst Vivek Juneja on June 11 estimated that Citigroup's (C) "Tier 1 common ratio under Basel 3 likely to exceed 8% by the end of 2012."

While lowering its long-term debt rating for Morgan Stanley to Baa1 from A2 last week, because of concerns over "(i) the firm's commitment to the global capital market business, on which it relies heavily for earnings; (ii) its historically high level of earnings volatility; and (iii) the problems in risk management and controls the firm suffered during the crisis," Moody's said on Thursday that its concerns were partially mitigated by "(i) the firm's gradually increasing "shock absorbers" in the form of earnings from other more stable businesses (albeit still below that of most peers); (ii) its reduced risk appetite, improved liquidity profile and stronger capital position; and (iii) enhancements to risk management, internal processes and controls."