Why This JPMorgan Bear Turned Bullish In A Heartbeat

JPMorgan Chase & Co JPM was doubled upgraded by Morgan Stanley Tuesday morning, while other banks caught downgrades from the firm.

What Happened: Morgan Stanley upgraded JPMorgan from Underweight to Overweight and raised the price target from $126 to $153.

Although Morgan Stanley remains cautious on large cap banks as a whole, JPMorgan stands out from the rest as the analyst firm sees progress being made on regulatory requirements, positive consumer banking trends, relative multiple resiliency during recessions and positive operating leverage ahead in 2023. 

"Operating leverage is the biggest driver of large cap bank stock alpha," Morgan Stanley analysts wrote in a new note to clients. 

The firm explained that negative operating leverage for JPMorgan in 2022 was a "key reason" for having an Underweight rating on the name, but it's expected to turn around. 

Morgan Stanley sees JPMorgan's revenues up 10% in 2023. Expenses are expected to be up 9%. The firm believes its estimates are conservative, therefore risks are likely skewed to the upside.

Morgan Stanley noted that JPMorgan is facing higher regulatory capital requirements and rising surcharges. The bank's required minimum CET1 ratio is increasing from 11.2% in the third quarter to 12% in the fourth quarter. It's expected to jump to 13% at the beginning of 2024. 

As a result of the challenges, JPMorgan paused buybacks and reduced risk-weighted assets, Morgan Stanley said.

"While there is still wood to chop, JPM is making progress ... We think this story is now well understood by the market and model buybacks resuming in 3Q23," Morgan Stanley said.

Check This Out: JPMorgan To Rally Around 17%? Here Are 10 Other Price Target Changes For Tuesday

JPMorgan is also taking share of deposits across the U.S. due to its 500 new branch builds since 2017. 

"Looking forward, we think JPM should continue to take share as 20% of JPM's branch network is <10 years old, significantly higher than industry average of 12% and big bank average of mid-single digits," Morgan Stanley said.

Lastly, JPMorgan de-rates less than competitors during recessions, according to Morgan Stanley. The firm downgraded State Street Corp STT and Bank Of New York Mellon Corp BK. 

Morgan Stanley's $153 price target on JPMorgan shares assumes a price-to-earnings multiple of 12 in 2023. JPMorgan is currently trading with a forward price-to-earnings multiple around 10, according to Benzinga Pro.

JPM Price Action: JPMorgan has a 52-week high of $169.81 and a 52-week low of $101.28.

The stock was up 0.94% at $132.62 at time of publication, according to Benzinga Pro.

Photo: courtesy of JPMorgan.