Morgan Stanley is advising its clients to “sell the rally” in financial stocks and is forecasting lower big bank earnings as the credit crunch continues with no end in sight.
Morgan analysts reduced its estimates for 2008 large bank earnings by 26% ($17 billion) and reduced 2009 forecasts by 15% ($13 billion). Higher loan losses and expenses are expected and profits could fall further if the Federal Reserve stops lowering interest rates. Analysts are expecting this crunch to be worse than the one in 1990.
According to Morgan Stanley’s top “long” picks, the Bank of New York, JP Morgan Chase, and PNC Financial Group have less credit sensitivity or better capital structures. In contrast, investors should be careful to “underweight banks like Wells Fargo, Wachovia, Fifth Third Bancorp, KeyCorp and Citigroup since those banks have a greater exposure to mortgages and risky assets.
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