UPDATE 1-Morgan Stanley ups large, midcap banks to attractive

May 11 (Reuters) - Morgan Stanley upgraded large cap and midcap banks to "attractive" from "in-line," citing stabilizing jobless claims, less-than-expected dilution from stress tests and the possibility of increased competition for loan growth easing borrowing costs.

Consumer nonperforming loan growth will peak sooner -- in the second half of 2009 -- rather than in the first half of 2010, due to stabilizing jobless claims, Morgan Stanley said.

More liquid wholesale credit markets and increasing competition among banks should lower borrowing costs for businesses over the next several quarters, reducing commercial non-performing loans, Morgan Stanley added.

The analysts said banks like JP Morgan (JPM.N), Wells Fargo (WFC.N), and Bank of America (BAC.N), which have capital markets exposure and are farther along in recognizing their loan losses, will be in a better position to accelerate lending.

Morgan Stanley said the upgrade of midcap banks was a long-term view, and that near-term volatility in the space will likely remain quite high.

It has an "overweight" rating on Webster Financial Corp (WBS.N), SVB Financial Group (SIVB.O), South Financial Group Inc (TSFG.O) and Hudson City Bancorp Inc (HCBK.O).

(Reporting by Archana Shankar in Bangalore; Editing by Anne Pallivathuckal)

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