Morgan Stanley says mid-cap banks are "attractive"

Aug 3 (Reuters) - Morgan Stanley recommended taking on more risk in the mid-cap bank space, saying second-quarter earnings were slightly better than expected and it now has greater confidence in its "attractive" industry view. "Stronger-than-expected net interest margin and higher earning asset balances more than offset a sharp decline in loan balances, driving top line growth. While non-performing loans continued to rise, the rate of growth is slowing," analysts Ken Zerbe and Yoana Koleva wrote in a note to clients.

The recent capital raises allow the banks to more easily absorb rising credit losses, the analysts said.

"While the industry still faces considerable credit headwinds from deteriorating commercial portfolios and rising unemployment, we believe the group provides a compelling investment opportunity for investors with a long-term time horizon," they said.

Though banks are likely to see rising credit losses over the next several quarters, "we believe this is more than priced into the shares," the analysts said.

The analysts see the greatest upside in companies that are trading below tangible book value, but have raised capital to support the workout of their problematic loan portfolios, including South Financial Group Inc (TSFG.O), Webster Financial Corp (WBS.N) and Zions Bancorp (ZION.O). The analysts' top "underweights" include Cullen/Frost Bankers Inc (CFR.N), M&T Bank Corp (MTB.N), TCF Financial Corp (TCB.N) and Westamerica Bancorp (WABC.O). For alerts, click on [nWNBB7675]

(Reporting by Sakthi Prasad in Bangalore; Editing by Ratul Ray Chaudhuri)

((sakthi.prasad@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: sakthi.prasad.reuters.com@reuters.net)) Keywords: MIDCAPBANKS/RESEARCH MORGANSTANLEY Keywords: MIDCAPBANKS/RESEARCH MORGANSTANLEY

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