Morgan Stanley: Bank Stocks Price In Modest Recession, Could Fall 17% In 'Deep Recession'

In a new report, Morgan Stanley analyst Betsy Graseck discussed what bank investors can expect if the U.S. falls into a recession or if market fears end up overblown and the economy remains stable. According to Graseck, the risk/reward balance is currently moderately bullish.

Morgan Stanley believes that most bank stocks have already priced in a modest U.S. recession. Graseck projects that bank stocks face only about 17 percent downside from current levels if the country falls into even a deep recession. On the other hand, if Morgan Stanley’s modest economic growth base-case scenario plays out, she sees 27 percent upside to bank stocks.

At this point, Morgan Stanley is not predicting a U.S. recession in 2016, but Graseck admits that the probability of one happening has gotten higher. “The risk of a recession is rising and our US economist has noted that even her well-below-consensus expectation of 1.8 percent GDP growth in 2016 is threatened,” she explained.

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However, if the United States avoids a recession, the firm sees the most upside potential for the following bank stocks:

• Synchrony Financial (NYSE: SNF)
• Capital One Financial Corp. (NYSE: COF)
• Bank of America Corp (NYSE: BAC)
• BankUnited (NYSE: BKU)
• Signature Bank (NASDAQ: SBNY)
• SVB Financial Group (NASDAQ: SIVB)

Disclosure: The author is long Bank of America stock.