Greek bank stocks could rise 90 percent on bailout cash deal: Morgan Stanley

People walk near an ATM machine in central Athens, Greece July 8, 2015. REUTERS/Cathal McNaughton

LONDON (Reuters) - Greek banking stocks could rise 90 percent from current levels and yield premiums over German benchmark bonds narrow if Greece and its creditors can reach a deal on releasing new bailout funds and debt relief, Morgan Stanley said on Wednesday.

The broker upgraded Greek bank stocks to “overweight”, saying current valuations did not reflect the compression in bond yield spreads that would follow a deal with Athens’ lenders and took an overly pessimistic view on the banks’ return on equity targets.

Passing the review would pave the way for Greek bonds to be eligible for the European Central Bank’s bond purchase program, the lifting of capital controls and an eventual economic recovery, Morgan Stanley said in a note.

“It won’t be easy, and it’s likely to be far from smooth,” the banks’ analysts said. However, they see passing the review as the most likely outcome.

Sources told Reuters earlier this week that no deal was likely at a special meeting of euro zone finance ministers on May 9.

International lenders have asked Greece to prepare a package of additional savings measures which would be passed into law now but implemented only if needed, to make sure the country reaches agreed fiscal targets.

Reporting by Vikram Subhedar Editing by Jeremy Gaunt