Bank Earnings Pair Trade: Morgan Stanley Vs. Goldman Sachs

Big bank earnings season is once again right around the corner, with Morgan Stanley MS and Goldman Sachs Group Inc GS set to report on Oct. 17.

For traders looking for a big bank pair trade heading into earnings, Credit Suisse analyst Susan Katze just repositioned her ratings on the two investment banking giants. On Monday, Katze upgraded Morgan Stanley from Neutral to Outperform and raised here price target from $49 to $54. At the same time, Katze downgraded Goldman Sachs from Outperform to Neutral, while raising her price target from $240 to $255.

According to Katze, Morgan Stanley simply has more room for upside remaining after Goldman’s impressive 42.7 percent gain in the past year.

“Sustained share price outperformance relies on above average and improving ROE prospects—recent results were, in aggregate, better than expected, but not quite up to the 10%+ ROE to be expected out of this franchise,” Katze said of Goldman. At the same time, she also wrote that Morgan Stanley and its 11 percent return on equity and best-in-class equities and investment banking businesses have set the table for impressive and relatively stable long-term earnings growth.

Credit Suisse adjusted its “blue sky” price targets for both banks as well. These targets represent a best-case scenario, which would include strong global economic growth, favorable regulatory reform, rising profit margins, increased capital efficiencies and expanding ROEs. Under this scenario, Katze sees Goldman shares as high as $324 and Morgan Stanley stock as high as $71.

For pair traders looking for additional bank earnings ideas, Credit Suisse maintains Outperform ratings on Bank of America Corp BAC, Citigroup Inc C and JPMorgan Chase & Co. JPM as well. The firm has a Neutral rating on Wells Fargo & Co WFC.

Related Link: Why JPMorgan, PNC Won't Be Good Buys This Coming Earnings Season