JPMorgan Downgrades Credit Suisse, Prefers U.S. Investment Banks

Global investment banks are set for a 21 percent decline in revenue this year, with European lenders including Credit Suisse Group AG most at risk, according to analysts at JPMorgan Chase & Co.

Fixed income will decline 18 percent while revenue from equities will fall 16 percent compared with 2015, the analysts led by Kian Abouhossein said in a note to clients Tuesday.

“There is no liquidity crisis in European investment banks in our view,” Abouhossein said. “But we see earnings at risk in a challenging credit trading environment, low level of deal flow and lower equity markets.”

The analysts upgraded Morgan Stanley and Goldman Sachs Group Inc. while cutting Credit Suisse Group AG. Their preferred investment bank is Deutsche Bank AG, followed by Goldman Sachs, Morgan Stanley, Barclays Plc, and UBS Group AG. Credit Suisse, Societe Generale SA and BNP Paribas SA are last in their ranking.

“We see material value in U.S. investment banks considering their excellent capital position at below tangible book value,” Abouhossein said. “We fail to see positive risk reward in Credit Suisse due to negative operating leverage in the current environment.”

JPMorgan estimated that Credit Suisse derives 58 percent of fixed-income revenue from its credit business, where the rout in commodity prices and rise in interest rates have been particularly damaging. Average exposure is 21 percent, the analysts said.

Bank stocks have swooned this year as global economic fears and falling commodity prices drive investors out of equities. Credit Suisse, which reported bigger-than-expected losses at its trading unit in the fourth quarter, has lost about 39 percent of its value this year.

John Cryan, co-chief executive officer of Deutsche Bank, sought to reassure investors last week by pronouncing his bank “rock solid,” as the cost of insuring against a default on their debt soared.

“We believe that the banks will be able to fund in private markets, well below current spreads if necessary, as we witnessed during the sub-prime/eurozone crisis,” JPMorgan said.

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