(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 clients.
The Dow Jones U.S. Banks Index .DJUSBK 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 downturn.
Some of the major rating and price target changes made by the brokerage are:
Graseck cut her rating on Citigroup Inc (C.N) 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
Bank of America Corp (BAC.N) 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) 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) and State Street Corp (STT.N) 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) was raised to "equal-weight" from "underweight" as Graseck believes an expected balance sheet restructuring will be a positive for the shares.
Graseck cut her price target on several other large-cap banks, including JPMorgan Chase (JPM.N), National City NCC.N and Fifth Third Bancorp (FITB.O), 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 Equal-Weight Bank of New York Mellon BK.N $50 $52 Overweight Fifth Third Bancorp FITB.O $39 $25 Underweight JPMorgan Chase JPM.N $59 $50 Overweight Keycorp KEY.N $30 $25 Underweight National City Corp NCC.N $32 $16 Underweight PNC Financial Services PNC.N $79 $76 Overweight US Bancorp USB.N $38 $31 Equal-weight Wachovia Corp WB.N $62 $42 Equal-weight