UBS is latest to downgrade shares of big banks

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Shares of Bank of America and JPMorgan Chase fell early Tuesday after UBS cut its ratings on the two stocks, piling on to Monday’s spate of big-bank downgrades.

UBS analysts led by Saul Martinez in a note urged “greater selectivity” in 2020. Martinez cited accelerating bank stock outperformance late last year, as concerns about lower interest rates eased. That was positive, he said, but “valuations now incorporate the persistence of historically elevated profitability levels.”

The UBS downgrades follow downgraded investment ratings for bank stocks including JPMorgan, Citigroup and Morgan Stanley earlier this week. Several analysts made calls that largely focused on rising risks, including election-year hesitancy and questions about new accounting rules.

With “fewer opportunities to add long positions,” UBS cut both BofA and JPMorgan to neutral. BofA's shares were down 0.2% early Tuesday while JPMorgan's were down 0.8%. The KBW Bank Index has fallen 1.3% so far this year, lagging a 0.5% gain for the S&P 500.

For JPMorgan, UBS’s Martinez sees a “high bar for further outperformance” as the stock trades at premiums not only to BofA and Citigroup, but to many large-cap commercial banks as well.

UBS’s scenario analysis suggests the shares would only yield ample upside if returns on equity reached “levels not generated by large U.S. banks since the immediate aftermath of the financial crisis.” Accounting rules known as Current Expected Credit Loss, or CECL, also pose risks, he said, echoing concerns raised by others.

For BofA, “risk to reward profile is balanced” after the stock’s “sizable outperformance,” Martinez said. BofA gained 43% last year, as did JPMorgan, while the KBW Bank Index rose 32%.

JPMorgan is due to kick off fourth-quarter bank earnings on Jan. 14, when the focus will be “all about the 2020 outlook,” Martinez added. He expects results to be characterized by net interest margin pressure, modest loan growth, limited operating leverage and benign credit quality.

Separately, UBS’s Eric Wasserstrom downgraded Capital One Financial to neutral, saying he continued to narrow his stock selection, as 2020’s economic conditions “may be less supportive than in 2019.” Wasserstrom cited UBS economist forecasts of slower gross domestic product growth and rising unemployment. He also called Global Payments his top pick, replacing Mastercard.

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