Morgan Stanley Weighed by Pay

NEW YORK (TheStreet) -- Morgan Stanley (MS Quote) shares were down Monday as Bank of America-Merrill Lynch cut its rating on the stock, arguing compensation costs put a cap on near-term earnings potential.

Analyst Guy Moszkowski cut his rating to "neutral" from "buy," saying Morgan Stanley's shares are "no longer deeply undervalued." He expects growth in book value per share will be limited "over the next several quarters." The analyst noted the "surprisingly competitive pay environment," as one of the factors influencing his cautious view.

Morgan Stanley's shares were down 3.5% to $28.49 in recent trading. Competitor Goldman Sachs (GS Quote) also was sliding 1.2% to $162.53 and JPMorgan Chase (JPM Quote) was adding 22 cents to $43.14. More deeply distressed financial names including Citigroup (C Quote), Fannie Mae (FNM Quote), Freddie Mac (FRE Quote) and AIG (AIG Quote) were all down by more than 4.5%.

Morgan Stanley's shares have run up about 60% during the past six months, but have trailed those of Goldman and JPMorgan Chase during that time. Morgan has been caught flat-footed by its rivals, which have shown a greater appetite for risk-taking as the financial crisis shows signs of abating.

A recent report in The Wall Street Journal indicated the bank is hiring more than 400 new executives, in an effort to stay competitive. That move drew criticism from Rochdale Securities' analyst Richard Bove, who argued in a recent research note that the bank appears to lack a coherent and consistent strategy.

-- Written by Dan Freed in New York.