Chris Kotowski: You Have Some Large, Spiked Heels To Fill, My Friend

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From: redacted at opco dot com
Sent: Mon Mar 16 14:35:06 2009
Subject: OpCo Re-Initiating on the US Large-cap Banks & Brokers (Sequencing the Recovery)- GS, MS, JPM, BAC, C - Chris Kotowski
US Large-cap Banks & Brokers (Sequencing the Recovery): Chris Kotowski (INITIATION)
While the timing of a recovery of the financial system is uncertain, the sequencing can be foreseen with a reasonable degree of confidence 1) A recovery of interbank lending and normalization of the TED spreads; 2) A recovery of credit spreads on the existing stock of corporate, asset-backed and mortgage-related debt instruments; 3) Successful investing in distressed debt and corporations; 4) The stabilization of NPA inflows at commercial banks; and 5) The resumption of loan growth. We believe we are navigating between steps 1 and 2 and would argue that the recovery of credit spreads will benefit trading volumes at the major investment banks. As we progress to step 3, the acquisition of distressed assets and companies, investment banks that advise and arrange financing for these transactions will once again largely benefit. The recovery will benefit commercial banking asset quality and loan volumes as well, but we believe this won't happen in the NT. Thus, for the time being, we recommend skewing holdings in the financial services industry more toward investment banking-oriented operations. Initiating coverage of GS, MS (both rated Outperform with $138 and $42 targets respectively), and BAC, JPM, and C (all rated Perform).

Goldman Sachs (GS - O) $138 tgt: Chris Kotowski (INITIATION)
Initiating coverage of GS, one of the world's leading investment banking, trading and asset mgmt firms, with an outperform rating and $138 target, based on our thesis that investment banks will outperform commercial banks due to loan portfolios dragging on commercial banks' performance. Bottom Line: Risk/reward is favorable based at 1.1x and 8.6x tangible book and our '10E EPS, respectively. Street View: 8 Buys, 10-Holds, 0-Sells
Morgan Stanley (MS - O) $42 tgt: Chris Kotowski (INITIATION)
Initiating coverage of MS, one of the world's leading investment banking, trading and asset mgmt firms, with an outperform rating and $42 target based on our thesis that investment banks will outperform commercial banks due to loan portfolios dragging on commercial banks' performance. Bottom Line: Risk/reward is favorable at ~93% of tangible book and ~7.5x our '10E EPS. Street View: 11-Buys, 8-Holds, 0-Sells
JP Morgan (JPM - P): Chris Kotowski (INITIATION)
Initiating coverage of JPM, a provider of investment banking, financial services, financial transaction processing, investment management, private banking, and private equity services worldwide, with a perform rating based on our thesis that commercial banks will underperform investment banks due to their loan portfolios dragging on performance. Bottom Line: JPM is our favorite perform rated stock given its near best in class returns in '08 and its likelihood to do so again in '09, but we'd stay on the sidelines and recommend investors focusing on the investment bank pure plays. Street View: 13-Buys, 7-Holds, 1-Sell
Bank of America (BAC - P): Chris Kotowski (INITIATION)
Initiating coverage of BAC, one of the world's leading financial firms providing a diverse range of banking and nonbanking financial services, with a perform rating based on our thesis that commercial banks will underperform investment banks due to their loan portfolios dragging on performance. Bottom Line: There is no doubt in the LT earnings power of BAC's franchises, but NT shareholders may not benefit from this earnings power due to potential dilutive recapitalization. Street View: 7-Buys, 11-Holds, 4-Sells
Citigroup (C - P): Chris Kotowski (INITIATION)
Initiating coverage of C, one of the world's largest consumer banking, commercial banking, and investment banking franchises, with a Perform rating based on our thesis that commercial banks will underperform investment banks due to their loan portfolios dragging on performance. Bottom Line: While C's situation is not hopeless given the company's immediate capital problem has been fixed following its highly dilutive common for preferred equity swap and its strong franchises that produce a strong stream of ongoing earnings, we'd stay on the sidelines and recommend investors focusing on the investment bank pure plays. Street View: 4-Buys, 9-Holds, 5-Sells

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