Bank stocks typically drop during recessions. This time around, with the big players well-capitalized, largely free from the worst of loan loss set-asides and benefitting from a rebounding economy, investors may be looking at an opportunity staring them in the face.The hot space — asset management Morgan Stanley MS, +0.59% has been making moves to become a premier asset manager. On Thursday, the firm said it would acquire Eaton Vance Corp. EV, +48.14% for $7 billion in cash and stock.
David Konrad, a managing director and senior research analyst at D.A. Davidson, sees Morgan Stanley’s moves as “lowering the risk of the franchise” and improving its return on equity. His “top idea” is Morgan Stanley because of its mix of businesses, strong level of capital and the addition of E-Trade. He wrote that J.P. Morgan Chase & Co. JPM, +2.05% “should regain its multiple” because of increasing revenue, lower credit costs after a brutal first and second quarters, and “increased visibility on its dividend.”
Provisions and reserve coverage A bank’s quarterly provision for loan-loss reserves is the amount it adds to loss reserves to cover expected losses on loans and leases. Yes, it is moving money from one bucket to another, but it directly lowers earnings. Bove cited a decline in commercial and industrial loans and “moderate growth elsewhere” as among the reasons provisions would decline, but also wrote that “it is beginning to appear that the banks may have over-reserved in the first half.”
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