Morgan Stanley slashed its estimates for large-cap banks again this morning–and cut Bank of America (BAC) to SELL. On a positive note, it now hates Fifth Third (FITB) slightly less than it used to.
Morgan’s BAC target goes from $33 to $15. Specifically, Morgan is wary of BAC’s buyout of Countrywide Financial, and expects BofA to cut its dividend by 20% and raise an additional $12 billion in capital. (But not going bankrupt? Let’s hear it for small favours).
More generally, Morgan sees no end to credit woes for large cap financials and thinks that, as residential mortgage values drop further, losses for banks will keep on growing.
We believe it is too early in the credit cycle to make a valuation call on large cap banks… A very large gap persists between the implied cum loss in residential mortgage assets that our fixed income colleagues are seeing and bank loan values. We estimate bank cum losses will settle somewhere in between, given that bank loans generally have higher underwriting standards than 3rd party originated loans
Morgan did, however, upgrade Fifth Third (FITB) from Underweight to Equalweight. Price target slashed from $21 to $13.
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