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Morgan Stanley Outpaces Financials: Upgrade Winner

NEW YORK (TheStreet) -- Morgan Stanley (MS) was the winner among stocks of large U.S. banks on Wednesday as shares rose nearly 1% to close at $28.25.

The New York-based investment bank was a positive outlier on a mostly weak day for financial names as UBS analyst Brennan Hawken Tuesday upgraded Morgan Stanley to `buy' from `neutral,' while raising his 12-month price target to $33 from $28.00.

"We have been increasingly positive on MS given its progress transitioning to a more wealth management driven business model, and our initial [Financial Advisors] Survey reinforced an improving outlook for continued expansion of wealth management profit margins and earnings power," Hawken wrote in a note to clients.

The analyst raised his 2013 earnings estimate slightly to $1.80 a share from $1.77, and raised his 2013 EPS estimate to $2.80 from $2.60, "driven by a lower compensation ratio and higher [net interest income] in the [Global Wealth Management] segment."

Long-term interest rates have been rising in anticipation of a decline in Federal Reserve purchases of long-term bonds which have been running at a rate of $85 billion a month since last September. The market yield on 10-year treasury bonds has increased to 2.92% from 1.70% at the end of April.

Hawken added that his firm expects "average yields will begin to increase modestly in 2014, roughly in line with our [net interest margin] outlook for the universal banks."

Morgan Stanley during the second quarter completed its purchase of Citigroup's (C) remaining 35% stake in the companies' retail brokerage joint venture, for $4.7 billion. A more even split in revenue between wealth management and asset management, "should translate into a higher multiple" for Morgan Stanley's stock, according to Hawken.

Morgan Stanley's shares trade for 10.9 times the consensus 2014 EPS estimate of $2.59 among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $2.95.

"Separately, we are raising our 2014 estimate for [Bank of America (BAC)] to $1.47 from $1.45, driven by improved expectations for their wealth management business." Hawken wrote.

The KBW Bank Index (I:BKX) pulled back slightly to close at 63.97 with all but eight of the 24 index components ending with declines.

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