Large U.S. banks passed their annual stress test last week with flying colors. Investor attention now shifts to this week’s Comprehensive Capital Analysis and Review, and Bank of America is expecting Morgan Stanley (NYSE: MS) to be one of the big winners.
Morgan Stanley didn’t perform particularly well on last week’s DFAST stress test, demonstrating material decreases in all the key minimum ratios compared to a year ago. Bank of America analyst Erika Najarian says the 2018 DFAST was as brutal as analysts had expected, and most banks will not be able to live up to capital return expectations.
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“Our payout expectations are generally below consensus given this year’s test parameters,” Najarian says.
Fortunately for Morgan Stanley investors, Bank of America says that relatively low ratios on the DFAST does not necessarily mean Morgan Stanley will come up short on the CCAR.
Bank of America is projecting broker banks, such as Morgan Stanley, will be approved to return an average of 60 to 90 percent of net income.
Morgan Stanley, on the other hand, is one of a handful of banks Najarian projects will exceed consensus capital return expectations. Bank of America is projecting Morgan Stanley will be approved for $7.5 billion in 2018 capital return payouts, roughly 88 percent of its net income. Consensus estimates are calling for only $7.3 billion in capital returns.
Bank of America’s projection includes a 12 percent quarterly dividend hike from 25 cents to 28 cents per share, representing a new yield of nearly 2.3 percent.
Despite a potential dividend hike, Bank of America projects Morgan Stanley will choose to focus most of its capital return on buybacks. Consensus analyst expectations for Morgan Stanley are calling for $5.11 billion in 2018 buybacks, but Bank of America is expecting $5.6 billion.
Beyond CCAR, Bank of America analyst Michael Carrier says there are a number of reasons for long-term investors to like MS stock.
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“We view MS as attractive given potential upside in wealth management from rising net interest income, retail engagement, and margins, upside in equities and [mergers and acquisitions], and an attractive valuation,” Carrier says.
Bank of America has a “buy” rating and $63 price target for MS stock ahead of the CCAR results.
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Morgan Stanley (MS) Stock Could Be a Surprise CCAR Winner originally appeared on usnews.com
