Morgan Stanley: Bank Stocks Price In Modest Recession, Could Fall 17% In 'Deep Recession'

In a new report, Morgan Stanley analyst Betsy Graseck discussed what bank investors can expect if the U.S. falls into a recession or if market fears end up overblown and the economy remains stable. According to Graseck, the risk/reward balance is currently moderately bullish.

Morgan Stanley believes that most bank stocks have already priced in a modest U.S. recession. Graseck projects that bank stocks face only about 17 percent downside from current levels if the country falls into even a deep recession. On the other hand, if Morgan Stanley’s modest economic growth base case scenario plays out, she sees 27 percent upside to bank stocks.

At this point, Morgan Stanley is not predicting a U.S. recession in 2016, but Graseck admits that the probability of one happening has gotten higher. “The risk of a recession is rising and our US economist has noted that even her well-below-consensus expectation of 1.8 percent GDP growth in 2016 is threatened,” she explained.

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However, if the United States avoids a recession, the firm sees the most upside potential for the following bank stocks:

• Synchrony Financial SNF
• Capital One Financial Corp. COF
• Bank of America Corp BAC
• BankUnited BKU
• Signature Bank SBNY
• SVB Financial Group SIVB

Disclosure: The author is long Bank of America stock.