Morgan Stanley: How Bank Investors Can Play 6 Global Themes For 2018

Positive synchronous growth momentum would benefit global banks in 2018, Morgan Stanley said in a Thursday note. The firm estimates 10 percent earnings per share CAGR over the next two years. in the sector. 

Among developed markets, the firm prefers the U.S., given the potential for deregulation that could fuel stronger growth, lower expenses and higher capital return.

Among emerging markets, the firm's favorite is China due to a rebound in industrial corporate growth and attractive valuations. The firm also likes India, as recent recapitalization could break the non cycle and lift return on equity.

Morgan Stanley identified six key themes in banking going into 2018 and its most- and least-preferred banks by theme.

1. Global Synchronous Growth

Morgan Stanley expects higher net interest margin and faster loan growth in 2018 thanks to a positive global macro backdrop. Among the developed markets, the firm prefers the U.S., while Europe is expected to see strong commercial loan growth, especially in Germany and France.

Argentina, China and Russia are among Morgan Stanley's preferred emerging markets. 

Most Preferred Names:

Discover Financial Services DFS
LendingClub Corp LC
Mastercard Inc MA
Charles Schwab Corp SCHW
SVB Financial Group SIVB
Visa Inc V
The Carlyle Group LP CG
Bank Of The Ozarks Inc OZRK

2. Shrinking QE & Rising Risks

Morgan Stanley said reversing quantitative easing could hurt deposit growth and cost and high-yield credit, particularly in the U.S. Given the very gradual pace of QE withdrawal in Europe, the firm doesn't think it would affect cost and availability of corporate credit there.

Most Preferred Names:

Bank of America Corp BAC
Oaktree Capital Group LLC OAK
• SVB Financial Group

Least Preferred Names:

• LendingClub
Northern Trust Corporation NTRS
Synovus Financial Corp. SNV
On Deck Capital Inc ONDK

See also: Bernstein Gets Bullish On Mid-Cap Banks

3. Rising Volatility

Prodded by less liquidity provisions from central banks and higher interest rates, volatility across asset classes is likely to rise in the second half of 2018, Morgan Stanley said. The firm said global wholesale banks and exchanges are likely to benefit more from the rise in volumes.

Most Preferred Names:

• Oaktree Capital Group
Goldman Sachs Group Inc GS

4. Diverging Regulations

Morgan Stanley sees the U.S. benefiting the most, as it expects deregulation to start soon. The firm sees regulations to be potential headwinds for Australian banks, while EEMEA banks could also suffer due to the coming IFRS 9 adoption. Europe could see manageable effects from BASEL IV and TRIM, the firm said.

Most Preferred Names:

• Bank of America
Citigroup Inc C
Citizens Financial Group Inc CFG
• Goldman Sachs
JPMorgan Chase & Co. JPM
KeyCorp KEY
• SVB Financial Group
E*TRADE Financial Corp ETFC

5. Active Relief

Morgan Stanley expects near-term active fund outperformance and global themes to drive growth surprise, relative to its base case.

Most Preferred Names:

T. Rowe Price Group Inc TROW
Invesco Ltd. IVZ

Least Preferred Names:

Waddell & Reed Financial, Inc. WDR

6. Faster Payments

"We believe the push for faster payments in the U.S. could be a win-win for both banks and payments/FinTech," Morgan Stanley said. Faster payments could boost digital adoption, increase customer loyalty and retention and reduce costs for banks, while for fintech and payment companies, it would open the door to new revenue opportunity.

Most Preferred Names:

• Bank of America
• Mastercard
• Visa
Wells Fargo & Co WFC

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