Bank stocks ‘set to fire on all cylinders,’ analyst says

Bank stocks are “set to fire on all cylinders” but not all banks will benefit equally, according to Morgan Stanley analyst Betsy Graseck.

Bullish on the sector

Morgan Stanley’s bank analyst is more positive on the sector ahead of multiple vaccines against the coronavirus making its way to the general public, Bloomberg reported. A more positive outlook on the economy will result in a “wave” of reserve releases and capital returns over a two year period.

As such, the analyst revised her rating on the large-cap bank and consumer finance sector from in-line to “attractive,” according to Bloomberg. The more bullish tone is based on expectations for the U.S. to return to some degree of “normalization” at around this time next year.

Not so much on all stocks

But this isn’t to say that every bank stock in the sector should be bought. Quite the opposite holds true as Morgan Stanley turned bearish on stocks like Bank of America Corp (NYSE: BAC) and JPMorgan Chase & Co. (NYSE: JPM). 

In fact, the analyst slapped both Bank of America and JPMorgan with a double downgrade, each to an Underweight rating.

The reason for a bearish stance on the two stocks is based on Bank of America’s tighter underwriting standards, according to Bloomberg. JPMorgan’s downgrade is based on expectations for a careful credit extension limit to restrict any upside momentum coming out of the pandemic-induced economic problems.

Goldman Sachs Group Inc (NYSE: GS) was spared a double-downgrade. Rather, the stock was downgraded from Equal-weight to Underweight. The analyst expects Goldman Sachs’ revenue to fall as “market volatility and the urgency around capital raising activity (both equity and debt) subside” next year.

Why consumer finance stocks?

Consumer finance stocks are better positioned moving forward since the group is better positioned to take advantage of declining unemployment levels. Meanwhile, the U.S. consumer is in better shape now than they were during the last recession with lower debt and higher home prices. 

The addition of fiscal stimulus makes consumer finance stocks “among the few that do not yet reflect a V-shaped recovery,” the analyst was quoted by Bloomberg as saying.

Top stock picks

According to Bloomberg’s recap of the analyst’s note, three of the research firm’s top picks in the banking sector include:

Ally Financial Inc (NYSE: ALLY) remains attractive amid the ongoing auto recovery and is “one of the best” net interest margin stories.

American Express Company (NYSE: AXP): normalization offers a “booster shot” for the travel and expense sector.

Capital One Financial Corp. (NYSE: COF): best positioned to reward shareholders with large share buybacks.