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JPMorgan, Morgan Stanley, KBW downgrade Wells Fargo

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JPMorgan, Morgan Stanley, KBW downgrade Wells Fargo

Downgrade

* The cease-and-desist order against Wells Fargo & Co. halts its asset growth. The bank wants to keep increasing loans and deposits and could reduce certain portfolios to make room. Such a move is expected to cut its 2018 net income by up to $400 million.

Keefe Bruyette & Woods' Brian Kleinhanzl's "major takeaway [is that Wells Fargo] will have to be defensive," shrinking its balance sheet to the point that it underperforms peers in net interest income growth, increasing expenses to resolve the issue as soon as possible, and asking for less than it might have in the 2018 Comprehensive Capital Analysis and Review. Kleinhanzl thinks earnings visibility may take at least a year to improve. He lowered the stock rating to "market perform" from "outperform" and dropped the price target by $7 to $63.

J.P. Morgan Securities' Vivek Juneja, calling the consent order a "rare and a strong sign of regulators' frustration," warns that Wells Fargo could lose more than just institutional deposits from scaled-back portfolios. Those deposits, after all, are tied to clients who may have other business with the bank, as well as business Wells Fargo may have been trying to win. This hit from the Fed could additionally pave the way for restrictions from other agencies and for increased regulatory scrutiny over other issues, such as foreign exchange trading. Juneja downgraded the stock to "underweight" from "neutral." The price target remains $67.

And Morgan Stanley's Betsy Graseck downgraded the stock two notches — to "underweight" from "overweight" — and the price target to $64 from $75. The Fed's "unprecedented" maneuver of forbidding expansion stops Wells Fargo from taking "full advantage of stronger economic growth and its significant excess capital position." The analyst revised her estimated 3.4% end-of-2018 loan growth down to 2%, the projected 3% securities growth to -1% and the expected 5% year-over-year increase in trading revenues to negative 5%.

Upgrades

* Piper Jaffray's Matthew Breese upgraded Blue Hills Bancorp Inc. and First Connecticut Bancorp Inc., both to "overweight" from "neutral."

The analyst remarked on Norwood, Mass.-based Blue Hills' asset sensitivity, loan growth and expense discipline, as well as its stock's year-to-date underperformance compared with other Northeast banks. Breese lowered the target price by 50 cents to $22.

Farmington, Conn.-based First Connecticut, meanwhile, is still "on the right long-term track," with a projected return-on-assets of 0.92% in 2019. Breese raised the target price by 50 cents to $29.

* Nashville, Tenn.-based Pinnacle Financial Partners Inc. also got an upgrade. Stephens' Tyler Stafford raised its rating to "overweight" from "equal weight" and its price target by $2 to $74.

Its stock is "trading at virtually the same [pre-merger announcement] price," Stafford wrote, meaning the market is ignoring the "associated EPS accretion, benefits of tax reform, and accelerating fundamentals from the legacy franchise." Pinnacle has also notably toned down its M&A messaging, according to the analyst, indicating that it recognizes a need to execute on the BNC Bancorp acquisition before announcing another deal.

* BMO Capital Markets' James Fotheringham upgraded CIT Group Inc. to "market perform" from "underperform" in light of tax reform, revenues and its amended capital plan.

Fotheringham wrote: "We commend CIT management for proposing the amendment. CIT's capital strength is not exceptional among its cohort; we strongly encourage others with equally strong (or stronger) capital ratios [Synchrony Financial and Santander Holdings USA Inc., for example] to seek similar capital plan amendments."

He raised the target price by a dollar to $49.

Industry reports

* Stephens' Matt Olney thinks "the stage is set" for better M&A trends among Texas banks.

McKinney-based Independent Bank Group Inc., at "overweight" and a price target of $83, now seems more likely to look into "transformative transactions," with targets including banks of all sizes.

Houston-based Prosperity Bancshares Inc., at "equal weight" and a price target of $76, may be looking at in-market banks with $3 billion to $5 billion in assets, although institutions with more than $10 billion are a possibility.

Olney expects Triumph Bancorp Inc. of Dallas, at "overweight" and a price target of $41, to announce at least one deal this year, possibly of an institution with $500 million to $1 billion in assets and a low loan-to-deposit ratio.

And the analyst thinks Dallas-based Veritex Holdings Inc., at "overweight" and a price target of $34, could return to M&A in 2018, possibly in the Houston metropolitan statistical area where it only has one branch.

* And Merion Research's Joe Gladue wrote: "Under [the Chinese zodiac], 2018 is the year of the dog. For the banking industry, 2017 was the year of the Fed [Funds rate] ... So far, 2018 is turning out to be the year of the tax cut."

That said, those Fed rate hikes remain among the most important drivers of bank results and valuations. Gladue also noted improvements in economic growth, which have so far pushed the median 2018 EPS growth estimate for banks with at least $500 million in assets up to 41.3%, compared with the previous month's 15.7%.