Morgan Stanley cuts BofA, says banks need more capital

(Reuters) - Morgan Stanley cut its rating on Bank of America Corp (BAC.N), and lowered its 2008 earnings view for large-cap U.S. banks saying the banks may have to raise additional $51 billion in capital and record further loan losses.

Analyst Betsy Graseck downgraded Bank of America to "underweight" from "equal weight" and said the nation's largest retail bank may have to raise $12 billion in capital and cut dividend by 20 percent in order to meet credit losses.

Graseck, who also expects Citigroup (C.N) to slash its dividend by 20 percent and raise $11 billion in capital in the fourth-quarter, said the credit crisis was "far from over".

The investment bank has a "cautious" rating on the large-cap banks. Fall in housing prices will lead to losses on residential mortgage loans, while slowing consumer spending will impact commercial loans, Morgan Stanley said.

Lowering earnings per share for large-cap banks by 37 percent in 2008, and 37 percent in 2009, the analyst said further provisioning of $265 billion for the large-cap banks from second quarter to the first half of 2010 was expected.

"Given the high degree of uncertainty on the ultimate size of the credit losses in this cycle, we believe the remaining underweight is the right call on the banks," Graseck wrote in a note to clients.

The analyst expects an incremental $2 billion collateralized debt obligation write-down in the second quarter.

Citigroup (C.N), Wachovia WB.N and Bank of America have the largest capital needs, Graseck said. She has "underweight" rating on all three stocks.

However, Morgan Stanley raised Fifth Third Bancorp (FITB.O) to "equal weight" from "underweight" and said the potential sale of its processor unit could reduce expected capital raises at the Midwest bank.

The investment bank also increased its dividend cut forecasts at several of the large-cap banks in order to bring dividend payout ratios to a range of 40 percent to 50 percent by 2010.

(Reporting by Sweta Singh in Bangalore, Editing by Dinesh Nair)