When Banks and Brokers Downgrade Each Other (BAC, MS)

It is usually a wonder when you see bank and brokerage firms analyst upgrades or downgrades on competitors in the bank and brokerage sector… Are they really downgrading themselves?  That is the question regarding Bank of America Corp. (NYSE: BAC) and Morgan Stanley (NYSE: MS) this morning.  Bofa/Merrill Lynch has downgraded Morgan Stanley.  The new rating, Neutral.  The old, Buy.    And the comments and the notes might be more important than the official rating change.

BofA/Merrill Lynch also cut the earnings estimates for both the third quarter and for the fiscal year.  The firm noted that upside at current prices is likely to be sluggish because shares are elevated and because there are very few catalysts remaining that would be able to keep taking shares higher.  BofA also noted that it is surprised by the competitive environment for sales and trading new hires when it comes to compensation and pay.  Specifically, BofA noted how Morgan Stanley is having to offer higher payouts toward retail brokerage operations to the point that it could take away some level of the firm’s earnings. BofA had previously noted how Morgan Stanley was deeply undervalued, but this report says that is no longer the case.

Morgan Stanley shares are down about 3% at $28.50 this morning in early trading indications; B of A shares are down almost 2% at $17.65 at the same time.  Financial stocks were already getting clipped after Barron’s pointed out a back to reality after such large gains.  But there is still the notion that when a bank of brokerage firm research analyst officially downgrades a competitor, they might in fact be unofficially downgrading their own firm.

JON C. OGG