UPDATE: Goldman Sachs Upgrades JP Morgan, Downgrades Morgan Stanley

Goldman Sachs has changed ratings on JP Morgan

from Buy to CL-Buy and on Morgan Stanley

from CL-Buy to Neutral on Tuesday. In the report, Goldman Sachs writes on Morgan Stanley, "We downgrade MS to Neutral and lower our 12-month price target to $16 on outsized capital market overhangs as we again cut EPS estimates. Near term, we expect muted capital markets activity to continue to weigh on sentiment and lead to negative EPS revisions. Longer term, while too soon to tell how counterparties will react to a new capital market ratings distribution post-Moody's, this cycle has proven that banks with the largest increase in funding spreads have lost trading market share." On JP Morgan, Goldman Sachs writes, "We believe the 15% decline in JPM shares has been drastic relative to 1) the 5% average EPS contribution of the CIO unit, 2) near-term returns even with stressed hedge losses, and 3) one of the lowest P/E and highest dividend yields in banking despite one of the highest and consistent return profiles. We estimate EPS could fall 50% from our forecasts before there is risk to the dividend and that JPM could exceed 9% B3 T1C by mid-2013. As such, buybacks could be re-initiated in 2012 which would likely further support shares." JP Morgan closed Monday at $35.32 while Morgan Stanley closed at $13.48.