Analysts at Macquarie have issued reports today on three major U.S. financial institutions, handing out new ratings for all three. They’ve initiated coverage on Bank of America Corp (NYSE:BAC) at underperform and Morgan Stanley (NYSE:MS) at outperform. They also downgraded JPMorgan Chase & Co. (NYSE:JPM) from outperform to neutral.

Bank Of America

All three reports came from David Konrad and Russell Gunther.

Initiating Coverage On Morgan Stanley

Although the analysts are fairly positive on all three financial companies, they are the most optimistic about Morgan Stanley (NYSE:MS).  They note that market volatility has had a major impact on the firm’s stock, pushing its beta higher as investors worried about capital, foreign entity exposure and liquidity. They also point out that the firm’s earnings have been volatile due to heavy expenses and also FICC result volatility.

More recently though, the analysts said they’ve seen Morgan Stanley (NYSE:MS)’s “strategy and execution take hold through consistent expense reduction, lower risk-weighted assets and increased ownership in the global wealth management business.”

They see the bank shifting toward businesses with higher multiples and that are less capital intensive. In their estimations, about 50 percent of the firm’s revenues will come from wealth and asset management. They also said that Morgan Stanley has increased its Basel III ratio from 7 percent in 2011 to about 9.8 percent in the first quarter of the year.

In their view, the firm will be “set up well for strong stock buybacks” next year. They initiated coverage on Morgan Stanley with an outperform rating because of the firm’s relative valuation to the group, as well as its strong capital and improving business mix. They’ve set their price target at $30 per share, basing it on their residual income model, which indicates a $29 per share price target and their sum-of-the-parts model, which indicates a $31 per share price target.

Initiating Coverage On Bank Of America

Macquarie analysts also see significant improvement in Bank of America Corp (NYSE:BAC), although they’ve rated it below Morgan Stanley. They initiated coverage on the stock at underperform because they believe that many of the benefits of the company’s current position are already factored into consensus estimates. The main benefits they see for Bank of America Corp (NYSE:BAC) include significant improvements in capital levels and improved earnings leverage because of lowered mortgage service costs.

Like Morgan Stanley, they say Bank of America Corp (NYSE:BAC) has improved its Basel III ration taking it from the lowest among its peers up to 9.52 percent. Overall, the analysts are very positive on Bank of America, but they’ve given it an underperform rating simply because they feel its valuation “appears rich” relative to the bank’s peers.

Downgrading JPMorgan

Macquarie analysts are also extremely positive on JPMorgan Chase & Co. (NYSE:JPM), although they’ve downgraded it from outperform to neutral. They said in spite of the London Whale fiasco, they view it as “one of the highest quality banks.” Their downgrade is due to valuation and also limited near-term catalysts.

They’re expecting relatively flat earnings for the bank over the next few years because they view the company’s earnings power as being in transition. Also since the bank is “already a high performing bank that has consistently invested for growth,” they see JPMorgan Chase & Co. (NYSE:JPM) has having “fewer potential benefits from operating leverage than peers.”