UPDATE 1-RESEARCH ALERT-Morgan Stanley cuts US large-cap banks

miércoles 31 de octubre de 2007 19:38 CET

 (Recasts throughout; adds analyst comments, background)
 By Nivedita Gupta
 BANGALORE, Oct 31 (Reuters) - Morgan Stanley downgraded the
U.S. large-cap banks sector to "cautious" from "attractive" and
said it expects a consumer credit recession to trump capital
market healing, which had been the basis of its hitherto
positive stance.
 Analyst Betsy Graseck expects a reduced supply of credit to
drive a contagion from subprime housing to prime housing to
auto to card loans.
 "We believe the liquidity squeeze that started in July will
drive up losses in consumer loan portfolios over the next four
quarters beyond our prior forecasts," Graseck said in a note to
 The Dow Jones U.S. Banks Index  has fallen 14
percent since the start of the year as U.S. banks grapple with
tightening lending standards, significantly higher
delinquencies on subprime loans, and a U.S. housing market
 Some of the major rating and price target changes made by
the brokerage are:
 Graseck cut her rating on Citigroup Inc (C.N: Cotización) to
"underweight" from "overweight," based on concerns about the
bank's collateralized debt obligation (CDO) portfolio, subprime
consumer exposure, structured investment vehicle exposure and
thin capital levels.
 Graseck said she was "baking in" an additional $1.1 billion
in CDO write-downs in the fourth quarter and another $1 billion
in the first quarter of 2008 for the bank, which has a CDO
exposure of $25 billion year to date. The price target on the
stock was cut to $36 from $57.
 Bank of America Corp (BAC.N: Cotización) was cut to "equal-weight" from
"overweight," based on deteriorating consumer credit, which BAC
is primarily exposed to in its credit card portfolio. The
bank's price target was cut to $44 from $61.
 Graseck downgraded Wells Fargo & Co (WFC.N: Cotización) to
"equal-weight" from "overweight," saying that it will be hard
for WFC to retain its premium multiple to the large-cap bank
group until delinquency rates stabilize.
 The price target on Wells Fargo was cut to $30 from $42.
 However, Graseck upgraded Northern Trust Corp (NTRS.O: Cotización) and
State Street Corp (STT.N: Cotización) to "overweight" form "equal-weight,"
saying the banks have much less consumer credit risk than the
average large-cap bank. SunTrust Banks Inc (STI.N: Cotización) was raised
to "equal-weight" from "underweight" as Graseck believes an
expected balance sheet restructuring will be a positive for the
 Graseck cut her price target on several other large-cap
banks, including JPMorgan Chase (JPM.N: Cotización), National City NCC.N
and Fifth Third Bancorp (FITB.O: Cotización), and expected further downside
risk to earnings per share if a consumer credit recession
spills into corporates.
 Some of the price target changes made by Morgan Stanley are
given below:
 Company Name              RIC         Price Target      Rating
                                    Old        New
 BB&T Corp                 BBT.N       $47        $39   
 Bank of New York Mellon   BK.N        $50        $52   
 Fifth Third Bancorp       FITB.O      $39        $25   
 JPMorgan Chase            JPM.N       $59        $50   
 Keycorp                   KEY.N       $30        $25   
 National City Corp        NCC.N       $32        $16   
 PNC Financial Services    PNC.N       $79        $76   
 US Bancorp                USB.N       $38        $31   
 Wachovia Corp             WB.N        $62        $42