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2 Downgraded Bank Stocks to Avoid

The banking sector has made an impressive comeback this year on the back of rising financial and capital market activities amid bullish market sentiment. However, Wall Street analysts expect Morgan Stanley (MS) and U.S. Bancorp (USB) to underperform their peers in the coming weeks, arguing that the current valuation of these stocks looks unreasonable. Read on.

While the near-zero interest rate environment has remained unchanged due to worries over the pace of economic recovery, the banking sector has been making a solid recovery on the back of increasing financial transactions and capital market activities. 

As investors scurried to react to news of the pandemic, and companies required help raising cash or hedging business risks, capital markets businesses helped large Wall Street banks navigate the pandemic.

However, Wall Street analysts recently downgraded Morgan Stanley (MS) and U.S. Bancorp (USB) because they anticipate shares of these megabanks will underperform their peers in the near term. They posit that these two stocks look overvalued at their current levels.

Morgan Stanley (MS)

MS is a financial holding company that offers a wide range of financial products and services to businesses, governments, financial institutions, and individuals across the Americas, Europe, the Middle East, Africa, and Asia. Institutional Securities; Wealth Management; and Investment Management are the company’s three operational segments. The stock was recently downgraded to ‘Sector Perform’ from ‘Outperform’ by RBC Capital Markets.

MS’ total expenses increased 46.1% year-over-year to $1.08 billion in the third quarter, ended September 30, 2021. In terms of forward Price/Book, MS is currently trading at 1.86x, which is 54.4% higher than the 1.20x industry average. Also, in terms of its forward non-GAAP P/E, the stock is currently trading at 12.84x, which is 11.2% higher than the 11.54x industry average.

The company’s EPS is expected to decline 4.3% in fiscal 2022.

MS’ POWR ratings are consistent with this bleak outlook. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

MS is rated C for Growth, Stability, and Value. Within the B-rated Investment Brokerage industry, it is ranked #16 of 22 stocks. To see additional POWR Ratings for Sentiment, Quality, and Momentum for MS, click here.

U.S. Bancorp (USB)

USB is a financial service holding corporation that offers a variety of financial services in the United States. It operates in the following segments: Corporate and Commercial Banking; Consumer and Business Banking; Wealth Management and Investment Services; Payment Services; Treasury and Corporate Support; and Treasury and Corporate Support. As of December 31, 2020, the company offered its products and services through a network of 2,434 banking branches, primarily in the Midwest and West of the United States, as well as internet services and mobile devices, and operated a network of 4,232 ATMs. Raymond James analyst David Long recently downgraded the stock to ‘Sell.’

For the third quarter, ended September 30, 2021, USB’s net interest income declined marginally year-over-year to $3.19 billion. In terms of trailing twelve months Price/Book, USB is trading at 1.84x, which is 53.1% higher than the 1.20x industry average. In addition, its 3.93x forward Price/Sales is 15.1% higher than the 3.42x industry average.

A $4.39 consensus EPS estimate for next year represents a 14.8% decline year-over-year. USB’s revenue is expected to decline 1.6% from the year-ago value to $22.86.

USB’s weak fundamentals are reflected in its POWR ratings. The stock has a C grade for Value, Growth, and Momentum. In the D-rated Money Center Banks industry, it is ranked #3 of the 10 stocks.

In addition to the POWR Ratings grades I have just highlighted, one  can see the USB ratings for Stability, Quality, and Sentiment here.

MS shares were trading at $101.59 per share on Tuesday morning, up $0.18 (+0.18%). Year-to-date, MS has gained 50.74%, versus a 21.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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