Morgan Stanley, Comerica upgraded at Wells Fargo in large-cap bank overview

Wells Fargo analyst Mike Mayo upgraded Morgan Stanley (NYSE:MS) and Comerica (NYSE:CMA) to Equal-weight from Underweight as he takes a more constructive view on large-cap banks overall, citing the potential for deregulation and greater flexibility to return and deploy capital.

The analyst increased price targets for large cap banks by a median of 9% due to a 15-year regulatory paradigm shift post-election. That provides an upward bias to EPS estimates in addition to a pre-existing estimate inflection to positive for net interest income, capital markets, revenue, EPS, and operating leverage.

“First, we estimate more excess capital than before, especially given likely better internal capital generations with estimated EPS growth inflecting from negative to positive,” Mayo wrote in a note to clients. “Second, capital market inflection should get a boost from additional merger and IPO activity.”

He sees the most stock upside for money center banks (+19%), followed by regionals (+10%), and trust banks (+7%).

Wells Fargo’s upgrade on Morgan Stanley (NYSE:MS) reflects an upward bias to capital markets revenue estimate after the election, the potential for an improved IPO pipeline, and increasing asset values boosting both Wealth and Investment Management units. MS price target raised to $142 from $107.

Mayo upgraded Comerica (NYSE:CMA) as it may benefit from industry consolidation, a shifting regulatory landscape, and “somewhat better prospects for loan growth post-election.” Price target raised to $73 from $51.

The view for banks is not without risk. “We repeat that the biggest risk is much higher than expected interest rates from deficits, tax cuts, labor, concern about Fed independence, or inflation that is tougher to tame than expected,” Mayo said. Also, populism could lead to a backlash against big banks.

Comerica (CMA) stock slipped 0.5% and Morgan Stanley (MS) rose 0.2% in Friday morning trading.

Mayo’s Equal-weight ratings on Morgan Stanley (MS) and Comerica (CMA) align with the SA Quant rating and average Wall Street ratings of Hold on both of the stocks and contrasts with the average SA Analyst rating of Buy on each.