Here's Why We're Bullish on Bank of America and Morgan Stanley
We do favor one over the other right now, and here's why.
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* Bank of America and Morgan Stanley both topped March quarter expectations.
* As expected, investment banking and asset management led the way.
* Bank of America expects a rebound in net interest income in H2 2024, which hangs on 3 rate cuts this year. We are skeptical.
* We favor Morgan Stanley over Bank of America near term.
Shares of Bank of America BAC and Morgan Stanley MS are moving in different directions following their respective March-quarter earnings reports Tuesday morning. While both companies delivered quarterly results that bested consensus expectations, with investment banking and asset management being standouts at both firms as we discussed on Friday, the business mix at banks and financial institutions is what distinguishes one firm from another.
While the mixes are different, we remain bullish on both as the investment banking market improves further and the eventual Fed rate cut helps loan activity and net interest income. The rebound in the latter looks to be more of a 2025 event, but the improving investment banking market and continued asset management share gains by both paint a favorable outlook.
Our view is that this positions MS better in the near term, especially as share gains are booked by Bank of America as we note the anniversaries of the Silicon Valley Bank and Signature Bank failures.
This explains the guidance between Bank of America, which sees its net interest income (NII) dipping sequentially in the current quarter, and Morgan Stanley sees it on par with the March quarter.
Bank of America sees its NII rebounding in H2 2024 but during the earnings call, management shared that guidance is based on the prospect of three rate cuts beginning in June.
Today’s comments from Fed Chair Powell that “firm inflation during the first quarter had introduced new uncertainty over whether the central bank would be able to lower interest rates this year without signs of an economic slowdown" suggests that Bank of America forecast may be a tad aggressive.
If H2 2024 NII at Bank of America matches the expected level of ~$14 billion for the current quarter and $14.2 billion in the March quarter, it would mean a modest trimming of our $39 price target.
However, as we discussed in today’s Daily Rundown video, the domestic economy has surprised to the upside, which could translate into better-than-expected loan growth. While we could trim our BAC price target to reflect more realistic NII expectations in H2 2024, we’d rather not whipsaw it around as we digest Wednesday’s Fed Beige Book and the upcoming Senior Loan Officer Opinion Survey (SLOOS) on bank lending that should be out in the next few weeks.
As that report is had, we’ll also have a better sense of the health of the IPO market, which would allow us to make a more informed decision when it comes to our price target. That indication of health would also be a factor in rethinking our MS price target of $100.
At the time of publication, TheStreet Pro Portfolio was long BAC and MS.
