U.S. Investment Banks Better Off Than European Peers? How To Capitalize

Fears related to capital risk at global investment banks might be overdone, according to new research from JP Morgan. Analysts, led by Kian Abouhossein, upgraded Goldman Sachs Group Inc GS and Morgan Stanley MS, while reiterating Deutsche Bank AG (USA) DB as its top pick.

"There is no liquidity crisis in European [investment banks]," Abouhossein wrote. Industry-wide earnings are at risk amid challenging credit trading, lower deal flow and an equity selloff, but it's possible the market is overrating this fear.

"[W]e see material value in US IBs considering their excellent capital position at below TBV," the analyst added, explaining that this led him to upgrade Morgan Stanley from Neutral to Overweight and Goldman Sachs from Underweight to Overweight.

Abouhossein gave a revised "pecking order" for the investment banking space, leading with Deutsche Bank:

• Deutsche Bank
• Goldman Sachs
• Morgan Stanley
• Barclays
• UBS
• Credit Suisse Group
• Societe Generale
• BNP Paribas

The analyst has an Underweight rating on BNP, and is Neutral on SocGen, UBS and Credit Suisse. All other names above are Overweight-rated.

Giving more color on why his team prefers U.S. based investment banks, Abouhossein said he likes the group's capitalization compared to European banks (which leads to dividends and buybacks), its ability to be ahead of litigation issues and "cleaner" P&L compared to European peers.

"[W]e prefer IBs that are shrinking and buying back shares in an environment where the market is valuing IBs well below P/TNAV as it is highly accretive," he added.

Morgan Stanley and Goldman Sachs are up an average of nearly 2 percent on Tuesday amid the upgrades.