Trust banks upgraded; Bank of America, Regions cut at Morgan Stanley

Morgan Stanley upgraded all three major trust banks — BNY (NYSE:BK), State Street (NYSE:STT), and Northern Trust (NASDAQ:NTRS) — on the expectation that the Federal Reserve will stop shrinking its balance sheet in March 2025. Meanwhile, the firm downgraded Bank of America (NYSE:BAC) as Morgan Stanley prefers money center banks with more exposure to capital markets, and Regions Financial (NYSE:RF) on a preference for lower exposure to credit risk.

Morgan Stanley analyst Betsy Graseck upgraded BNY (BK) and State Street to Overweight from Equalweight and Northern Trust (NASDAQ:NTRS) to Equalweight from Underweight, noting that an end to quantitative tightening bodes well for trust banks’ deposit growth against all three of Morgan Stanley’s scenarios — base, bull and bear.

“Amid this backdrop, our y/y deposit growth forecasts of 3-7% could prove conservative, meaning increased upside risk to net interest income from higher earning asset volumes, aided by margin improvement from a steepening yield curve and above-peer deposit betas,” Graseck wrote in a note to clients.

Specifically, Morgan Stanley sees BNY’s (NYSE:BK) operating leverage improving 150 basis points on the back of key drivers, including a capital markets rebound, QT ending, and U.S. Treasuries issuance, and its Platforms Operating Model driving growth and efficiencies.

State Street (NYSE:STT) should see net interest margin expansion and net interest income growth in 2025 as rates decline, supported by a high deposit beta and a skew to fixed-rate securities “that will continue to roll positive.”

Morgan Stanley withholds an Overweight rating from Northern Trust (NTRS) due to relative valuation and an expectation for modest negative operating leverage in 2025 and 2026 offsetting the tailwinds common with its peers.

Bank of America’s (NYSE:BAC) cut to Equalweight reflects the bank’s relatively low exposure to capital markets vs. its peers, with Morgan Stanley estimating investment banking and trading will reflect 27% of revenue at BofA vs. 32% at Citigroup (C) and 68% at Goldman Sachs (GS). “In a bear case, BAC is more credit exposed vs. capital markets pure plays. In a bull case with rising 10 year yield, we expect unrealized HTM (held-to-maturity) losses to rise above current $86B levels, which could impact stock performance,” Graseck said.

Regions Financial’s (NYSE:RF) downgrade as Morgan Stanley trims exposure to credit risk due to the possibility for its bear case scenario. “While RF enjoys a favorable position as a strong deposit gatherer in markets with positive in-migration trends, C&I (commercial & industrial) growth is the driving force behind the business model’s success: >50% of total loans are C&I, and ~66% when including CRE (commercial real estate),” the firm said.

Among the five stocks discussed, only Northern Trust (NTRS) gets a Buy rating from the SA Quant system.

In Monday morning trading, BNY (BK) rose 0.6%, State Street (STT) increased 0.6%, Northern Trust (NTRS) gained 1.6%, Bank of America (BAC) dipped 0.5%, and Regions Financial (RF) slipped 0.7%.