JPMorgan Chase has less potential upside than Bank of America, Citi or Goldman, according to one analyst

By Steve Gelsi

Morgan Stanley analyst Betsy Graseck cuts JPMorgan to equal-weight from overweight due to stock's outperformance

Morgan Stanley analyst Betsy Graseck downgraded JPMorgan Chase & Co. stock on Monday, noting the stock's strong performance as she surveyed the impact of lower interest rates on the banking sector.

JPMorgan Chase (JPM) drew a rating cut to equal-weight from overweight after its stock rallied 23.8% in 2024, outpacing the 20.3% gain by the S&P 500 SPX as well as the 20% rise by the Financial Select Sector SPDR ETF XLF.

With lower interest rates reducing the cost of capital for banks but also limiting the amount of interest they charge on loans, Graseck said JPMorgan Chase may offer investors less of a boost than others in its net interest income margin, which is the profit lenders get on loans relative to the money they pay out for deposits.

"We see more room for positive net interest margin surprises elsewhere in our coverage, model negative operating leverage next year and are taking some chips off the table after outperformance," Graseck said about JPMorgan Chase.

U.S. Bancorp (USB) was upgraded to over-weight from equal-weight on its prospects for greater net interest margin due to the bank's "relatively high concentration of interest-bearing deposits, which should reprice quickly as rates fall," Graseck said.

Grasek reiterated overweight ratings on Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Bank of America Corp. (BAC) on the expectation for an increase in capital markets revenue due to lower interest rates, as well as the view that they may boost their stock buybacks as the U.S. Federal Reserve pares back its capital requirement proposals for banks.

Graseck said the U.S. Federal Reserve's 50-basis-point rate cut earlier this month signals a quicker-than-expected pace of interest-rate reductions, which is a positive for net interest margin at midcap banks, and more mixed for larger-cap banks.

Morgan Stanley economists now expect an additional 150 basis points of rate cuts by the middle of 2025.

The lower rates will spark more capital markets activity as the cost of borrowing comes down. This will benefit both large-cap and midcap banks, she said.

Banks poised to get the biggest boost to net interest margin include Wells Fargo & Co. (WFC), due to the bank's "strong levels of excess capital" as well as efforts to win a reprieve on the Federal Reserve's asset cap. Graseck reiterated an overweight rating on Wells Fargo.

Also read: Wells Fargo's stock up on reported progress on its biggest outstanding regulatory issue

Morgan Stanley's Graseck sees the most potential net interest margin expansion at KeyCorp (KEY), Prosperity Bancshares Inc. (PB) and Cadence Bank (CADE).

JPMorgan faces the biggest potential drop in net interest margin among larger banks, along with BNY (BK) and Bank OZK (OZK).

Along with her downgrade of JPMorgan Chase, Graseck upgraded Zion Bancorp (ZION) to equal-weight from underweight.

She also downgraded Commerce Bancshares Inc. (CBSH) to underweight from equal-weight.

Also read: Largest U.S. banks will catch a break from Fed's capital-rule changes, KBW says

-Steve Gelsi

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09-30-24 0729ET

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