In a recent report, Rafferty Capital Markets’ Vice President of Equity Research Richard Bove laid out his bullish case for Morgan Stanley MS 0.03%. In the report, Bove gave his take on the modern banking environment in the U.S., including his opinion that bank balance sheets are now nationalized.

Government Threat

Bove believes that the post-crisis regulations on the balance sheets of American banks have essentially resulted in the government taking control of this aspect of American banking.

“From my perspective, these balance sheets have been nationalized. Therefore, banks must emphasize non-balance sheet activities if they wish to grow beyond changes in interest rates.”

Bove sees this shift in emphasis already in progress at The Bank of New York Mellon Corp BK 0.23%, Wells Fargo & Co WFC 0.46% and SunTrust Banks Inc STI 1.7%. Bove sees activity in the wealth management aspect of banking picking up in these American names. Similar government policies in Switzerland and Canada have driven banks in those countries to do the same. Bove notes that periods of extremely competitive wealth management in the past have led to “bad decisions” by banks.

James Gorman Disagrees

Bove recently spoke with Morgan Stanley CEO James Gorman, and Gorman sees another explanation for past troubles. According to the report, Gorman attributes the past cyclicality of the banking industry to high fixed costs. These costs can be (and have been) reduced in recent years by properly scaling-up wealth management practices and employing a very large number of producers.

Outlook

Bove admits that Gormon’s thesis has been correct so far, and he is “inclined to believe it will work in this period also.” Bove believes that Morgan Stanley has a strong position in the wealth management sector due to its scale and wide product array.

Rafferty Capital has Buy ratings on Morgan Stanley, Wells Fargo, Bank of New York Mellon and SunTrust. It has a $49 price target on Morgan Stanley.

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