JP Morgan shares downgraded by Jefferies because the Fed could be done hiking rates

Key Points
  • Jefferies downgrades J.P. Morgan Chase and a bunch of other banks
  • Analyst Ken Usdin also cites competition for loans and deposits and concerns about credit quality.

Jefferies downgraded J.P. Morgan Chase and a bunch of other banks because the Federal Reserve could be done hiking interest rates, which in turn, will hurt banks' profitability.

"The biggest change to our ests. is from removing rate hikes from our models," wrote analyst Ken Usdin, who also cited competition for loans and deposits, as well as concerns about credit quality, especially on products such as leveraged loans, as reasons for his change in outlook. Rising recession fears could also weigh on the group.

Usdin cut J.P. Morgan shares to hold from buy and cut estimates for the next three years. The analyst also downgraded SunTrust Banks and U.S. Bancorp to hold from buy. He also downgraded some smaller banks.

J.P. Morgan shares have held up pretty well amid a big sell-off in the sector, down 7 percent the last 12 months versus a 14 percent decline for the Financial Select Sector SPDR.

"We expect that revenues could fall short of consensus expectations for both NII (driven by fewer rate hikes, yet still rising deposit betas) and fees (lower trading/IB, asset management/servicing, and mortgage fees)," the analyst wrote about the bank specifically. NII — net interest income — is generally the difference between what the bank charges for long-term loans and the rate it pays out for short-term deposits.

Jefferies' 12-month price target on J.P. Morgan goes to $110 from $130. The stock closed Monday at $100.76, up 3 percent for 2019 as markets bounced back from last year's losses. The rally got a boost from comments last week by Fed Chairman Jerome Powell that the central bank would be patient in deciding whether to hike rates again after four increases last year.